Democracy and Governance in Serbia
The Development Challenge:
Serbia is one of the two republics in the State Union of Serbia and Montenegro. According to the 2002 census, Serbia has a population of 7.5 million (excluding Kosovo), more than 12 times larger than that of Montenegro. The ethnic composition is considered to be predominantly Serbian (82.86%) while the rest of the population is made up of Hungarian (3.91%), Bosniaks (1.82%), and Roma (1.44%), Croats (0.94%), Albanians (0.82%), Slovaks (0.79%), Vlachs (0.53%), Romanians (0.46%), Bulgarians (0.27%). Refugees and internally displaced persons make up around 6.7% of the population.
Serbia's economy picked up pace in FY 2004. After low economic growth of 2% in 2003 due to drought and industrial sector weakness, gross domestic production is projected to grow by 6% or more in 2004; this would be the highest growth since 1997. Inflation increased slightly after a three-year decline, but is expected to remain at 11% to 12% for 2004. Total foreign exchange reserves remain solid and stable at a value equal to nearly five months of imports, bolstered by large unrecorded remittances from abroad. However, the Republic continues to lag behind other countries in the region. Throughout 2004, the process of enterprise restructuring in Serbia remained stagnant due to a lack of political leadership and a preoccupation with past privatizations. It is expected to increase in FY 2005. The underdeveloped business environment constrains the growth of the private sector, and investment remains low due to perception of high risk. Serbia's key macroeconomic challenge remains the sustainability of external accounts in an environment of reduced but still significant foreign currency debt and a growing trade deficit expected to reach $7 billion in 2004.
Such macroeconomic progress stood in marked contrast with the political reforms that slowed considerably in the aftermath of the assassination of Prime Minister Zoran Djindjic in March 2003. Parliamentary elections in December 2003 led to a coalition government that has not advanced reform substantially. The government formed by Prime Minister Vojislav Kostunica of the Democratic Party of Serbia (DSS), depends on Milosevic's Socialist Party (SPS) to achieve a parliamentary majority. The Democratic Party (DS) of former Kostunica rival Djindjic, remains in opposition. Following three failed presidential contests, Boris Tadic of the DS was elected President of the Republic. He remains popular, and has taken a number of forward-leaning positions on Kosovo, ICTY, and EU integration, but due to limited constitutional powers has not been able to achieve government action. Local elections held in September 2004 left anti-reform forces with more influence or even control in 22 out of 162 municipalities, including Novi Sad, Serbia's second-largest city.
In the absence of additional progress, this year the real challenge was sustaining the implementation of previously accomplished reforms. Despite international pressure, the Serbian Government has failed to cooperate fully with the International Criminal Tribunal for the former Yugoslavia (ICTY). Following Serbia's lack of cooperation with the ICTY and non-compliance with the requirements defined under the Sections 570 and 572 of the FOAA, of the total assistance allocated in FY 2004, $99.4 million, Serbia lost $20.4 million (20%), of which $13.6 million was managed by USAID. It is possible that USAID will be able to recoup $3.65 million of these withheld funds for specific democracy and governance activities. There remains a real risk of additional planned funds being lost in FY 2005 for lack of certification in the next fiscal year
In March 2004, violence in Kosovo fueled the revival of extreme nationalist feelings that dominated Serbian politics for most of the spring. The violence largely did not spill over into the ethnically-mixed region of Southern Serbia. Pressures from both sides over the relationship of Serbia and Montenegro in the state union have increased. The unresolved political issues and stagnating reform process have all put a strain on the situation, and early and extraordinary elections are now possible in the first half of 2005. Compliance with ICTY, addressing Kosovo's status and the future of Serbia and Montenegro State Union, and preserving and consolidating macroeconomic gains through fiscal discipline and prudent monetary policy, with an increased focus on micro-economic issues to increase jobs and spur economic development, will be among the challenges for Serbia's leaders in the coming year.
(Excerpted from the 2006 Congressional Budget Justification for Serbia)
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