Belgrade, April 2000

Many liberal intellectuals have considered sanctions an admissible measure for punishing regimes which are undemocratic, dictatorial or aggressive to their neighbours, rather than employing military intervention, a direct and drastic cure which can be worse than the disease itself. Countries which are exposed to both military intervention and sanctions are a special case in which the sanctions complement or continue the military strikes rather than substitute for them.

Many democratically-oriented experts in Serbia have had a similar belief but very soon after the sanctions were imposed it became obvious that undemocratic regimes, thanks precisely to their lack of democracy, can avoid the sharp edge of the sanctions while the helpless people (those whom the sanctions should, in theory, help) became their actual victims.We are then immediately able to see, even in the case of bombing, the dictators and their ruling clique deep in their well-stocked bunkers, suffer little from the bombs while the people, civil infrastructure and civilian enterprises (those which are not underground or otherwise protected) suffer considerable damage as they have nowhere to hide and must continue with their everyday lives in order to survive. By the very fact that they are under no compulsion to heed the democratic response of the people to their behaviour but survive instead by repressing the people, dictatorships are ‘free’ from concern for the fate of the people during military intervention or under sanctions. Thus, in undemocratic regimes during military intervention or under sanctions, the people suffer doubly under both the dictatorship itself and the foreign forces which purport to be its opponents! This effect of sanctions (and similar military or non-military interventions) has been observed in every country which has been exposed to them, from Cuba through Iraq to Yugoslavia.

The European Union halted all forms of cooperation (economic, financial and technical) with the Federal Republic of Yugoslavia in November 1991.

From November 8, 1991, the European Union unilaterally suspended the Agreement on Cooperation of 1980 and related arrangements and filed a decision on the complete termination of the Agreement of Cooperation with the Socialist Federal Republic of Yugoslavia on November 29, 1991. Liabilities due on loans from the European Investment Bank could not be paid because of the cessation of financial cooperation. The Federal Republic of Yugoslavia was removed from the list of users of the General Scheme of Trade Concessions of the EEC. The use of resources under the PHARE program was blocked. The Traffic Agreement of 1991, the Third Financial Protocol and all programs of scientific, technical and cultural cooperation were suspended. Most countries imposed visa requirements for Yugoslav nationals. Cooperation between the European Parliament and the Parliament of the Socialist Federal Republic of Yugoslavia were suspended.

On May 30, 1992, the United Nations adopted Resolution 757, imposing sanctions on the Federal Republic of Yugoslavia. The EEC endorsed this fully and implemented all its regulations and measures.

In a session of the Council of the European Union on December 5, 1995, the Decree on Suspension of Sanctions Against FR Yugoslavia was adopted in keeping with the UN Security Council’s Resolution 1022. All sanctions were formally lifted in October 1996.

Approval was given in June 1997 to preferential status for the import of goods from FR Yugoslavia.

These concessions were cancelled in April 1998 because of irregularities in local elections in Yugoslavia. Sanctions were again imposed in the form of restrictions on investments in Yugoslavia. This particularly affected privatisation, traffic, the use of state and other financial support, insurance and guarantees in terms of exports and credits. In September 1998 restrictions on air traffic with Yugoslavia were imposed.

In June 1999 the ban on investments was expanded to include private investments in equipment purchases for companies in Yugoslavia.

At the end of February 2000, the re-establishment of air traffic with Yugoslavia was approved. It was expected that this should be implemented during March.

Serbia has been under sanctions for almost a decade. The punitive measures against the country have been wide-ranging in nature and have been imposed on several occasions by the Security Council of the United Nations, the European Union and the United States of America. The first group of sanctions (1991-1995) was widely seen as being related to Serbia’s role in the dissolution of the former Yugoslavia while the second (1998-1999) came as a result of Serbia’s policies during the escalation of the crisis in Kosovo. After years of general trade and financial sanctions, along with those on culture, sports and air traffic, Serbia gave up its interference in the war in Bosnia and Herzegovina and cooperated in the reaching of the Dayton Peace Accords (1995). The Security Council and the European Union then freed both Serbia and Montenegro from all punitive measures.

Of the new sanctions, related to the conflicts in Kosovo, the Security Council’s embargo on arms imports and the EU sanctions on imports of equipment which could be used for repression are still in force as are the European Union’s oil embargo (which has been suspended for Montenegro and Kosovo), and the ban on investments, i.e. the denial of loans from the European Union for trade with Yugoslavia. In the same way financial assets of the Yugoslav Federation and the Republic of Serbia held in the European Union and the United States have been frozen and these countries have also banned the issue of visas to several hundred senior officials and associates of federal and Serbian authorities.

For eight years Serbia has also been subject to sanctions imposed unilaterally by the United States. The remaining "outer wall" of these sanctions blocks Yugoslavia from membership in international institutions. To these were added, in 1999, a US trade embargo, from which Montenegro was shortly afterwards exempted.

The goals of sanctions are impossible to achieve with the required, analytically adequate, precision. These goals are seldom explicitly formulated, especially not in any way which does not leave great leeway for a wide range of subsequent interpretations. What occasional formulations are given cannot be taken with any certainty to express exactly the goals of those who initiated the sanctions. Despite this it is possible to gain some insight into the motives behind the sanctions. The aims of the sanctions can probably not be interpreted as the desire to punish a nation nor as the determination to take some sort of revenge for this or that kind of political behaviour, such has the nation having given most of its votes to an authoritarian regime operating behind a thin and translucent, but completely effective, facade of democracy.

Yugoslavia has been subject for ten years to a range of sanctions, differing in character and intensity. It is clear that there have been multiple consequences of these but, even after ten years, it is difficult to discern any among them which can reasonably be assumed to have been directly envisaged by the architects of the sanctions. Even after ten years of this punishment the government remains unchanged, its self-confidence still intact; it has maintained significant support from the electorate. The dwindling of that electoral support and the erosion of the government’s political capital can hardly be ascribed to the sanctions, even with the best will in the world. This paper will argue the position which has been asserted more and more frequently and with stronger and stronger arguments that if the sanctions have had any political result it has been to strengthen, rather than weaken, the present government.

As far as the real goals of the sanctions go, only more or less reasonable suppositions can be made. We may assume with fair certainty that the first aim was to topple the regime against which they were imposed. There is no single previous case of sanctions having been put in place against a regime which enjoyed good international repute or which had a strong and friendly relationship with those who initiated the sanctions. The second aim, equivalent to the first and equally convincing, could be a radical change in the political behaviour of the regime on which sanctions are imposed, particularly in the area of international relations. The third possible goal, again closely related to the first two, is a strong and politically critical drop in the support given by the local political public to the ruling elites which are the target of the sanctions.

International experience has clearly and, it would appear, relentlessly, suggested that none of these possible goals has ever been successfully achieved. With the possible exception of South Africa, sanctions in different periods and in different parts of the globe against regimes which have been politically diverse but, without exception, authoritarian, have by and large failed to bring the desired and expected results. It can be established beyond argument that sanctions have not changed the policies of Castro, Gadafi or Kim Il Sung or brought any significant decrease in their popular support. On the contrary, there are adequate indications that sanctions have contributed to their popularity and considerably increased their political capital.

Sanctions have in fact provided the targeted regimes with a wide range of material for political manipulation and have facilitated the mobilisation of almost unreserved support from the local public through the well used and almost always effective paradigm of the enemy outside the walls.

The result of the sanctions in the reallocation of political power, in the sense of bolstering the political strength of leaders who dominate societies unchallenged, has became evident and has attracted the attention of analysts to such an extent that there are now broadly accepted and deeply rooted claims that the designers of sanctions have a single, ultimate and fundamental goal, however deeply concealed. This goal of the sanctions’ architects in fact involves the maintenance and strengthening of the current authoritarian order so as more easily to solve, at least in the short term, certain problems of the major powers through cooperation with the leaders of small countries who can deliver what has been agreed. Of course this ability to deliver depends to the greatest extent on the ruling elite's authoritarian control over the whole society.

We should note here one important socio-psychological factor of the support achieved by the authoritarian order thanks to the sanctions. Sanctions, whenever they have been imposed, have nominally targeted the government, which results in the illusion that the government itself has been the major victim of the sanctions although they have always afflicted the people to a much greater extent. As a result of this coincidence, which is by no means unexpected but nonetheless very important, the people have always developed a strong sense of solidarity with the political leadership, even if, under normal circumstances, they neither liked nor respected the government. This phenomenon permits the establishment to make enormous political mileage from the perception of joint suffering and the feeling of exposure to a common enemy or a common source of evil.

In this way the population at large, including its vital, politically articulate stratum, develop a kind of Pavlovian reflex: the exposure to a common danger and the simultaneous blows from the international environs on the leadership and the society as a whole can not fail to produce this sense of solidarity. The feeling of solidarity is then followed by calls to support the government and place it above other political options (i.e. the opposition). This is perhaps the strongest mechanism through which sanctions have strengthened the existing government instead of weakening it as might have been concluded, at least prima faciae.

No less importantly, the international sanctions have been, in addition to the many internal reasons, one of the limiting factors in the democratic reconstruction of Serbia.

Why would the lifting or partial abolition of the sanctions expedite and facilitate the process of democratic change?

1. This would decrease the isolation of Serbia’s citizens. Every instance of isolation plays into the hands of the authoritarian regime. The greater the isolation, the greater the chance of political despotism surviving. Conversely, every opening up and decrease in isolation increases opportunities for the democratic options.

2. The lifting or easing of sanctions increases the opportunities for the international community to exert a direct influence on the positive processes of democratic change. The lifting or easing of sanctions would increase the political and economic interest and motivation of most the population in rapid democratic change.

3. It would, in an effect closely related to the second point, open broader channels and facilitate greater influence of the international civil society on the weak and underdeveloped civil society in Serbia. The lifting or easing of sanctions would allow greater presence of international organisations and non-governmental organisations and foundations from the West and allow them to have a greater impact on the development of the civil sector in Serbia. This would contribute to the spread of a democratic political culture and create a much firmer social foundation for the work of democratically oriented political parties.

4. The maintaining of sanctions is playing into the hands of the current regime and worsening the position of the democratic political bloc which is interested in change. The sanctions prevent or hamper international cooperation in many areas of social life (primarily culture, tertiary education, health care and sometimes even sports) which is enabling the regime to execute its plans for the total annihilation of the institutional structure of society and the impoverishment and devaluation of whole areas of social life.

5. The lifting of sanctions would improve the general social and economic position of the middle class and the urban population. By all indications these are the strongest and the most reliable social base for democratic political change.

6. Years of sanctions coupled with the NATO campaign have created anti-Western sentiment in part of the population. These flames have been well fanned by state propaganda. This feeling on one hand calls many values of the democratic world into question and on the other creates a fear of democratic change. The lifting or easing of the sanctions would further narrow the opportunities for such negative feelings and fears while simultaneously creating a broader space and more suitable atmosphere for pro-European orientations and values. This would have a direct positive effect on the election potential of the united democratic opposition, particularly as this approach would win over many voters from the younger generations.

7. If the West were to accede to arguments and pressure from the democratic opposition in Serbia and lift, or at least ease, the sanctions, this would increase confidence in the democratic opposition bloc among a substantial part of the electorate (which is at present undecided and in a state of resignation). Parallel with the decline in popularity of the ruling parties, the stocks of the opposition parties and their leaders have also fallen with the public. Any move to abolish or partly lift sanctions before the elections in Serbia which is clearly attributed to the opposition's good relations with the West would increase the political credibility of the democratic opposition and considerably restore public confidence.

8. Finally, if the international community were to lift or ease the sanctions at the suggestion and demand of the democratic opposition in Serbia (leaving in force only those measures which directly and personally target the regime), it would narrow the regime’s opportunities to libel the opposition as traitors and collaborators with the West, which is constantly presented in the state media as an enemy of Serbia.

These are some of the reasons for the international community to re-examine the current regime of sanctions as soon as possible with a view to fully or partly abolishing or easing them. Leaving this until after elections may be interpreted by many people as lack of international interest in the result of these elections and a lack of real interest in democratic change in Serbia. Like the democratic political leaders on the local scene the international community must carefully avoid a situation where consideration and assistance for the democratic forces in Serbia comes too late. To put it simply, the risk to the democratic opposition in Serbia of losing the coming elections is so great that it must not be permitted to happen. This would not only be a defeat of the democratic opposition in Serbia. It would also be defeat of Serbia as a whole and the closing down of the country’s future for many years to come. It would also, in some way, be a defeat of the international democratic community.

Finally, the sanctions should be lifted because they are not effective, or are even counter-productive. There is no single case which proves any change in behaviour of the targeted political group because of the sanctions. There is not a single case in history which shows that trade embargoes or similar economic sanctions have achieved any success, no matter what the aims of the party introducing the sanctions. This is a consequence of the fact that the condition of universality has never been achieved, nor will it ever be. Regardless of how large or powerful the group imposing the sanctions may be, there will always be competition from those who attempt, and succeed, in profiting from them.

The very fact that the sanctions against Serbia and Yugoslavia have lasted so long is perhaps the best indication of their lack of effectiveness. Over almost the whole decade the policy of the Yugoslav and Serbian leadership has certainly changed in accordance with demands from the international organisations and the states which imposed the sanctions, but the sanctions have not been the only, nor even the most important, reason for these changes. The results of the sanctions, furthermore, have been diametrically opposed to those expected: they have become the principal and universal excuse of the authorities for all economic problems and have simultaneously been perceived by a majority of the population as a collective retaliation against a people and a state, rather than as a punishment for the policies of a government.

Some sources in the West have claimed that the sanctions were imposed with the aim that the Milošević regime would either change its policies or be toppled by the distressed people.

This is a completely erroneous supposition. People who are without medicines, adequate food and water have energy only to keep themselves and their families alive. They do not form masses which could begin a revolution against a strongly armed regime, particularly, as in Yugoslavia’s case, while their "friends" abroad deliver them bombs from overhead.

History in fact demonstrates that sanctions extend the life of non-democratic regimes. It has been found that undemocratic regimes exposed to sanctions last longer than those which are not. The Vietnamese regime remained in power for twenty years because of sanctions. The Cuban regime has survived for more than thirty years thanks to the US sanctions. The regimes in Romania, Spain, Portugal and Greece would not have been replaced had the West imposed sanctions on them. The change of regime in South Africa was possible only after the sanctions were substantially mitigated and these were not, in fact enforced. The undemocratic regime in Croatia has recently been replaced without the benefit of sanctions. Many opponents of Sadam Hussein believe that the Iraqi regime will last as long as sanctions are in place. The same is true of Serbia, despite the increasing unity and strength of the opposition.

Among their other negative effects, sanctions prevent transition as no transition from a closed to an open society is possible while the economy is not exposed to direct foreign investment and market competition. Sanctions turn every foreign investment into a criminal act and make exports impossible. This not only prevents transition but also progressively destroys the economy of the targeted country at the same time.

The economic sanctions were imposed on Yugoslavia by a resolution of the UN Security Council on May 30. They were subsequently revoked twice. They have had a negative effect primarily on the public in Serbia, many of whom have politically opposed the regime. The regime has very skilfully used the indiscriminate impact of the sanctions to accuse the international community of "animosity to the people of Serbia" and attempts at the "colonisation" of those people. These allegations have fallen on fertile ground and have provoked and increased revulsion for the Western countries (anti-Westernism) and xenophobia, particularly among the poorly-educated, less-informed older populations of rural and semi-rural areas. It is exactly this group which in elections so far make up the "voting army" of the parties of the "Red-Black" coalition (the Socialist Party of Serbia, the Yugoslav United Left and the Serbian Radical Party).

The regime in Serbia, through its official propaganda, has used the introduction of sanctions to shift the blame for its economic and social failures and shortcomings to the Western countries (the USA, Germany, Britain, France etc.) and their anti-Serb policies. On this basis the regime has at least partially managed to present its policies as patriotic and defensive. This sham was believed, judging by the results of elections for the Serbian Parliament (1992, 1993, 1997) and the Federal Parliament (May 1992, December 1992, 1996), by a large percentage of the Serbian population. Although irregularities in the system and frauds favouring the ruling party mean that these elections cannot be described as free and fair, there is no doubt that the ruling coalition has managed to win the support of a relative majority of the republic’s electorate in successive elections.

The assessment of the economic effects of sanctions is not a simple task. Other effects have been in force in tandem with the economic sanctions. Among them we should especially note the inappropriate economic policy which led to hyperinflation in the 1992-93 period and the civil war in the neighbouring region or NATO aggression against Serbia.

Table 1 presents data on trends in industrial production and overall foreign trade. The sanctions, of course, first affected foreign trade and, through that, industrial production. From industrial production they bring about a drop in employment and other macroeconomic parameters.

Hyperinflation began in 1992, even before the Security Council imposed sanctions on Yugoslavia. The sanctions were implemented in June 1992. Their effects were later multiplied in tandem with inappropriate economic policy, which culminated in the hyperinflation of January 1994. The Monetary Reconstruction program was then put in place. This brought about relative stability in the economy. However the level of production at the time of lifting the sanctions in December 1995 was exactly the same as that of January 1993. Foreign trade followed a similar pattern.

We thus constructed a dummy variable, UN sanctions for the June 1992 - January 1993 and February 1994 - November 1995 periods. Another dummy variable, hyperinflation, is introduced in the February 1993 - January 1994 period.

Sanctions were reintroduced by the European Union in 1998. This analysis takes September 1998, when the ban on air traffic came into force, as the date of their becoming effective. The dummy variable EU sanctions thus encompasses the period from September 1998 to January 2000, with the exclusion of the three months of NATO bombing. This period is marked by the dummy variable NATO for April 1999 - June 1999.

With the aid of these dummy variables it becomes possible to assess the economic impact of the sanctions. Before that assessment is made, however, we should analyse two series which best illustrate the effects of sanctions: industrial production and foreign trade indices.

The chart below shows overall foreign trade (imports plus exports) for the period January 1991 - January 2000. Both periods during which sanctions were formally in place are highlighted.

At the point when UN sanctions were imposed, monthly foreign trade amounted to some US$ 800 million. After sanctions were imposed this fell to US$ 200 million. Over the course of 1993 foreign trade was partially restored and during this period fluctuated between US$ 600 million and US$ 200 million. In January 1994, when hyperinflation reached its peak, trade fell to below US$ 200 million. When the sanctions were suspended, foreign trade was partially restored but not to a level beyond US$ 400 million.

Thus, with wide fluctuations, at the point when the sanctions were suspended, foreign trade had fallen to half the level of the period before the sanctions were imposed.

The second period pertains to the EU sanctions. These where imposed when the monthly level of foreign trade was US$ 600 million. The level then fell to US$ 400 million. During the NATO aggression that level fell another US$ 200 million.

Sanctions have had a similar effect on industrial production, as shown in the chart below. This analysis takes 1998 (1998 average = 100) as the basis of industrial production indices. At the moment the UN sanctions were imposed, the level of industrial production was almost 170 index points. At the end of the first period of sanctions it fell to below 90 index points. At one point during hyperinflation it fell to only 50 index points.

On the other hand, from September 1998 to January 2000, the level of industrial production fell by some 40 index points (from 110 to 73).

Evaluation of the industrial production formula

On the basis of the above equation, a model was developed to enable a logical experiment in what the behaviour of production would have been without any one of the four external shocks related to sanctions. For example, what would the level of production be had the UN sanctions not been introduced in June 1992, with all other shocks occurring: hyperinflation, the EU sanctions and NATO aggression?

This in essence is a matter of assessing the marginal effects of each individual external shock. Their value, however, depends on the combined effect of the other shocks related to the sanctions. We repeated the experiment for each of the external shocks, in each case with the assumption that only one was excluded. Other scenarios are, of course, possible. The effects of external shocks are permanent, diminishing slowly over time so that each subsequent shock builds on the accumulated effects of all previous shocks.

The individual effects on national product in industry are listed in Table 3.

Partial effects of the outside shocks on lost national product in industry:1992-99

With regard to the analysis of individual effects, the UN sanctions had the most severe effect on production, with inappropriate foreign policy during hyperinflation being next in size of impact. The effects of the current EU sanctions cannot yet compare with the earlier factors because of the shorter period of time which has elapsed since their introduction, among other things. By itself, without the parallel impact of the EU sanctions, the NATO aggression reduced the national industrial product by over a billion USD over the past year.

We have assessed the foreign trade equation in a similar way to that for industrial production. This evaluation is shown in Table 4.

Evaluation of the foreign trade formula

In analysis of individual effects, the most severe impact on foreign trade was from the UN sanctions. Next was inappropriate foreign policy during the period of hyperinflation. The effects of the current EU sanctions cannot yet compare with the other factors. On its own, without the parallel impact of the EU sanctions, the NATO aggression reduced foreign trade over the past year by US$ 1.3 billion.

Partial effects of external shocks on lost foreign trade: 1992-99

These results are fully symmetrical as in the case of the analysis of the partial effects of sanctions on the drop in industrial production. The conclusion should not be surprising, given the close relationship between foreign trade and industrial production.

On the basis of the above analysis, several conclusions may be drawn:

2. New sanctions are cumulative with the remaining effects of earlier sanctions.

3. The effects of the sanctions currently imposed by the EU are weaker than those of the UN sanctions.

6. Inappropriate economic policy can have more severe negative effects than international sanctions.

The aims of the sanctions cannot be reduced to the destruction of the economy in a society which obviously doesn’t fit into predominant international trends. The initiators of the sanctions have no interest in this if for no other reason than that Yugoslavia is one of their major debtors. Anyone undertaking the economic destruction of their debtors is simultaneously undermining economic and financial interests of their own which are by no means insignificant. The damage done on that front is absolutely and obviously greater than any possible political gain from the undermining of the ruling elite’s economic base. It is in any case by no means certain and, indeed, it is unlikely that the weakening of the economy inevitably leads to the political weakening of the oligarchy which has remained in power so persistently and successfully.

The performance of the sanctions is not equally distributed, nor can they be said to impact on all social groups. It may safely be claimed that this is the case with any major blows to an economy and a society which, by their very nature, are multi-faceted and complex. Experience again shows that the distribution of the sanctions’ effects runs counter to the goals sought in imposing them. The greatest victims of sanctions are the broadest part of the population - the ordinary people and the uneducated masses. There are firm indications that sanctions inflict damage proportional to the level of disadvantage already suffered by certain groups and individuals in the division of income. This is especially true of the inhabitants of urban agglomerates and urban areas. The rural population, at least in terms of overall social impoverishment and economic decline, is something of an exception in this respect. The overall deterioration in standards may also afflict the rural population and the results of sanctions are clearly felt in their standard and style of living, but the downward trend is less pronounced, resulting in a relative improvement of the situation of the rural population by comparison with the general absolute decline.

The members of the ruling groups are the ones least affected by sanctions. By precipitating a fall in the overall economic situation and afflicting the social community as a whole, the sanctions change the relations of power and strengthen the position of the ruling circles in relation to the society at large. In an impoverished community, the rulers manipulate society as a whole much more easily and efficiently. The sanctions increase the political capital of the authoritarian establishment which in any case depends more on social misfortune and ruin than on prosperity.

It has long been obvious to most economists that the introduction and maintenance of sanctions have had little if any negative effect on the political elite in power while they have been a grave or substantial affliction on the population in general.

In addition to allowing a limited circle in or near power to accumulate enormous wealth (because its members control all the mechanisms of illegal imports and sales in the grey market of embargoed products such as oil and oil derivatives), the maintenance of the sanctions has a direct, doubly negative effect on possible economic and democratic change.

Sanctions impose many severe restrictions on normal economic operations. They are, in fact, an attack on the market system. Many transactions and entire areas of economic traffic which once functioned spontaneously and without hindrance become impossible; many things which once happened freely as a matter of daily business routine are violently disrupted.

It is natural and almost inevitable that in so unbalanced a situation, economic entities turn to the state for assistance and protection. This is because business has almost nowhere else to turn in such a situation and the nature of the problems arising demands administrative intervention to a much greater extent than in normal circumstances. In addition to this, there is suddenly and quite unusually a whole series of problems which can be addressed only by the state itself.

The wider political and economic consequences of this unusual alliance of economy and state are very obtrusive and easily recognised. The market elements of the economy are additionally weakened while the role of administrative mechanisms and the procedures of decision-making and management in the economy increases greatly in importance. In addition the general takeover of economic life by the state becomes a prominent and pervasive trend while economic decisions and traffic are increasingly orchestrated with the logic of a state of force and enforcement and less and less according to voluntary transactions and the spontaneous vectors of the market. The economic system comes increasingly to resemble a war economy.

Entrepreneurial models and their focus are substantially deformed. Instead of inventing new products and processes, new markets and management companies, new resources and new modes of management, entrepreneurs increasingly turn to the state to seek preferential treatment for which sanctions are a welcome justification. The economy increasingly assumes the characteristics of re-distributive, exploitative behaviour. It is increasingly less focused on increasing productivity and creating new values. Instead of concerning itself with increasing production and creating new value, the economy turns more and more to reallocating existing value and laying claim to what other people have already created. The long-term consequences of this change in the focus of entrepreneurship are lethal, far-reaching, global and difficult to quantify. What is certain is that they are extremely disadvantageous and can undercut economic efficiency for decades to come.

Another consequence of this all-encompassing state grip on the economy is the fatal negative selection in the entrepreneurial field. Rather than those most efficient in technical progress and increased productivity, the most successful are those who are best at developing their relationships with state bodies and their administrative hierarchies. Meanwhile, those who can contribute to the economy and the society most, and in the only productive way - the creation of new value - find themselves in the most difficult situation. This negative selection has multiple and enduring consequences which are difficult to neutralise. Redistributive, exploitative elements come into dominant positions in the economy and, consequently, the society. Once they have strengthened and established themselves it becomes difficult to push them aside even once the general economic situation has normalised and the conditions of economic operations undergo essential change. They become a part of the lethal heritage of immoral times which the economy and the society as a whole will be hard put to rid themselves of. In addition to all this, the economy and the non-economy become accustomed to administration and state regulations. This process of perverted learning also has permanent consequences.

The reversal of these consequences may turn out to be a longer, more expensive and more uncertain process than has been their creation in those periods when sanctions literally force the economy to resort to administrative mechanisms and operations. It is difficult to imagine a more difficult and dangerous deformity in the economy than its becoming accustomed to government patronage or the accompanying permanent orientation to administration as an important factor of economic management.

The administrative rechanneling of the economy and its launching of mechanisms for the bureaucratic coordination of economic processes have significant indirect effects. By refocusing economic and social entities onto the reallocation, rather than the production, of technological innovation, the bureaucratisation of the economy permanently and markedly decreases the efficiency of the economy. The inefficient economy then works back towards further bureaucratisation. Fewer and fewer economic sectors and units are able to survive without economic intervention and protection. The inefficient economy also results in general weakening of the economic system and the society as a whole. The directorate draws its political power mostly from the weakness of the economy and the society which lives on that economy. This global reallocation of political power can only delay the moment of political change, make democratisation more difficult and increase the uncertainty of a successful transition to a productive democracy if and when the time comes for that important social task to be undertaken.

The ruling political elite in Serbia have used economic sanctions as a tool for their own accumulation of wealth. In a "closed economy" established through the operation of the sanctions, members of the elite have accumulated their wealth through the exploitation of a monopoly. That monopoly, among other things, includes the import and export of goods, loans at favourable rates, the purchase of hard currency at the official rate of exchange while the black market rate is three and a half times that and so on. In addition, in an economy isolated from the world market, the members of the ruling elite and their families and friends have taken control of entrepreneurial functions and attracted into "their own orbit" entrepreneurs who, in a state-regulated economy, can do business only with the backing of members of that elite. In this way, members of the ruling political elite, during the economic sanctions, have acquired, in parallel with the general impoverishment and economic ruin, enormous wealth and gathered economic and political power into their hands.

One important and utterly destructive effect of sanctions is the undermining of the legal system. Even in the most well-ordered societies, laws are designed for normal, universally predictable conditions and circumstances. When the whole social ambience, and thus the environment in which economic and, especially, financial transactions are carried out, is so broadly and drastically changed as a result of sanctions, a large number of laws simply become seriously inappropriate for the new, substantially changed, conditions.

The enforcement of the law therefore becomes essentially more difficult and in many cases this is closely related to the obvious and by no means insignificant damage. In such circumstances there appears a huge temptation to circumvent legislation or even suppress laws and interpret their meaning and content with the utmost latitude. There is enormous pressure to suppress or devalue the whole legal system and there is no doubt that this pressure has many enormous and enduring effects.

Through the discrepancy between the spirit of the law and the changed reality in which it is applied, enormous damages and scars are inflicted on the legal system which are difficult to remove.

The erosion of the legal system - although as difficult to quantify as the damage it produces - has lethal consequences which will probably be felt for decades. A modern economy can function only as a decentralised economy and decentralised systems are almost unimaginable without a high level of legal security. Legal security implies both the trust of social entities in the stability of regulations and the consistent and uncompromising enforcement of those regulations and an ability to predict the relevant parameters of the business environment which should arise from the stability of the system. The legal system is an unavoidable pillar both of the economy and the whole system of modern (and perhaps any) civilisation. Any blow against the legal system is equivalent to undermining what is vital for the decentralised economy. A blow to the legal system is tantamount to a strike on the institutional foundations of civilisation. It is comparable to, although less spectacular than, the attack on the foundations of civilisation through the great Communist experiment. The consequences of this are too well known to need further explanation.

Because of the breadth of the damage they inflict on a society and individuals, sanctions have an essential element of abuse of political power which is inhuman and thus contrary to natural law and order. The price of the political goal sought by sanctions is too great. In Iraq sanctions have already claimed hundreds of thousands of lives through hunger and poor health care. Infant mortality has reached an extremely high level. In Serbia, thanks to the strong private agricultural sector, the consequences will not be so dramatic. However it would appear that there will inevitably be a large number of deaths from a lack of heating in winter, poor health care and a shortage of basic medicines in maternity hospitals.

The consequences of sanctions are worse than any military aggression or any other act banned by international law. International law is based on respect for human life, human rights and human society. Sanctions ruin human lives on a large scale. Sanctions enable and encourage a lack of respect for basic human rights in undemocratic regimes. Sanctions destroy human society. Therefore, under international law, sanctions are illegal.

Sanctions encourage illegal trade and corruption, they morally destroy the society under sanctions and, at least to some extent, its neighbours. Sanctions make all trade illegal and therefore expose every business to the possibility of intimidation and blackmail by the regime. Corruption is often the only way to do any kind of business under sanctions. Crime and corruption on such a large scale can lead to the moral ruin of an entire society for many years. Undemocratic regimes can only profit from such a situation.

Sanctions are not capable of perfect targeting and absolute precision. In addition to their target they hit the immediate neighbourhood of the country under sanctions and have tangible repercussions for a broader international community.

Neighbouring countries have strong trade and other relations with the targeted state. In observing the embargo on this traffic they lose all the benefits and effects they have previously enjoyed from it. This is because trade as a form of interaction among states has the nature of a game with a positive score. Trade generates considerable benefits for all participants and stopping or seriously hindering that trade results in the loss of those benefits. In comparison to the normal pre-sanctions situation, the loss or substantial reduction of trade represents pure economic loss. It is not surprising that the countries neighbouring Yugoslavia have on a number of occasions widely published their assessments of the major damage they have suffered as a result of the sanctions imposed on Yugoslavia. These assessments are, of course, exaggerated, in an attempt to secure the greatest possible reparation from the developed countries. However the damage has certainly been done and it is by no means insubstantial. The very fact that the sanctions have to some extent forced Yugoslavia’s trade partners to find alternative markets and alternative resources is enough to demonstrate the fact that we are dealing here with considerable costs. These costs function as investments, because making inroads into new markets and securing new sources of supplies both require the forging of new business networks, the building of a business reputation, acclimatisation to new trade conditions and, perhaps most importantly, selling at lower and purchasing at higher prices. All of this must be done over an extended period of time until the new relationships have become more permanent and the new partners committed to ongoing, systematic cooperation. What gives these economic sacrifices the character of investments is the fact that the positive results achieved from them can, with the usual uncertainty, be expected over a much longer period leading into the distant future.

The same arguments are valid not only for countries in the immediate vicinity of the state under sanctions but also throughout the broader international region. There are often strong trade relationships affecting states which are not immediate neighbours. In the case of the Socialist Federal Republic of Yugoslavia, for example, the main trading partners were two non-neighbouring countries, the Federal Republic of Germany and the USSR. Thus the same problems, although to an obviously lesser extent, occur in the wider environs of the country under sanctions.

Compensation is given, or is supposed to be given, to those countries directly affected by those imposing or enforcing the sanctions. This itself is also an effect of the sanctions. Depending on whether this compensation is actually given and, if so, whether it is at a satisfactory level or not, it is clear that it leads to international tension, the deterioration of relations among some countries, prolonged negotiations and exhaustive bargaining. These effects are not easily quantifiable they are nevertheless a serious cost of sanctions affecting a wide range of countries, even those which have only indirect interaction with the country against which the sanctions are imposed.

They ways in which sanctions interfere with the free flow of traffic are obvious. The country under sanctions is, as a rule, prohibited from providing traffic services, which means that economic entities from a large number of neighbouring and non-neighbouring countries are forced to find alternative, longer and more expensive traffic routes and to establish new business relationships. Establishing these new links generates costs comparable with those of making inroads into new markets or securing new sources of supplies and further comment would be superfluous. Sanctions almost always prevent the normal development of traffic infrastructures in the country subject to them. This affects both neighbouring countries and those in the broader environs in the most direct way. Traffic routes of international importance require close international cooperation for both their initial establishment and modernisation. Such cooperation is blocked by sanctions. This also necessitates the rerouting of traffic to alternative and much more expensive routes and to a general increase in business overheads.

Experience to date shows that the construction of strategic traffic routes which skirt countries under sanctions has often been considered. In this way the country would be bypassed by international traffic. However it soon appeared that this kind of plan was not acceptable, that many of the solutions were not feasible, that the costs would be much greater than initially envisaged and that such ideas should be abandoned. However the costs of these feasibility studies and the costs of preliminary planning for the implementation of this solution are not inconsiderable and must be included in the overall cost of sanctions.

Regardless of the fact that they bring more good than harm to ruling circles, sanctions inflict great damage on the economy of the targeted country and are injurious in many ways to the society as a whole. The country, as a result becomes a kind of weak spot, a locus minoris of the wider territorial and political units to which it belongs. Many aspects of this weakened position have a complex negative impact on other countries. Because they weaken a particular country, both economically and otherwise, sanctions in a sense interfere with the global geopolitical balance and thus bring harm to a much broader territory than the country they target. The ways in which these disturbances of the geopolitical balance affect individual countries have not been adequately studied and little is known of them. There is, however, no doubt that these disorders are serious and the resulting costs are by no means insignificant. Although difficult to quantify, one of the overall consequences is a general reduction of security which results in a broad spectrum of negative consequences for the economy and other spheres of life. Lack of security is a real deterrent to entrepreneurship, that most essential element of a decentralised economy without which the economy’s prompt adjustment to changing conditions, rational restructuring, rapid assimilation of innovations and technical progress, as the most important factor in economic growth and the successful development of the society as a whole, are impossible. One consequence of the general reduction of security as a result of serious disorders in the geopolitical balance should be explicitly mentioned. This is the discouragement of the inflow of foreign capital and, equally important and perhaps even more harmful, the outflow of domestic capital. The normal flow of capital and its permanent deployment in the mobilisation of other economic resources are not compatible with a politically induced high level of insecurity.

For the sake of completeness we should mention that in some sectors and for some (usually neighbouring) countries, sanctions can have some positive effects. A country under sanctions must secure some access to imports which are fundamental to the economy and life in general. It must secure these through its neighbours who find in this a source of fast, easy and substantial income. The Yugoslav experience has produced many examples of this. However even these positive effects are followed by less visible long-term negative effects which are perhaps even greater than the short-term effect of quick and copious profits. This income is generated through criminal activity with major breaches of the law and dangerous erosion of the legal system. The undermining of the legal system is a very dangerous development for any country and its long-term consequences may amount to a blow to the basic social values without which a civilised existence is not possible. The country under sanctions thus appears as an encircled territory which radiates peril into its near and distant surroundings, threatening a much broader set of functions and values than those within its own borders.

Sanctions, in fact, strengthen the regime they target. This has been demonstrated in Vietnam, South Africa, Cuba, Iraq and, now, Yugoslavia. Every targeted regime welcomes sanctions as its officials line their pockets breaking them. With sanctions in place all transactions are carefully controlled by the regime which takes bribes to allow these transaction while on the other hand it licences smuggling which is a source of enormous accumulation of wealth for the members of the regime, their families and those loyal to them. The negative effects of sanctions are mostly felt by the people and especially those social strata which are anti-regime and inclined to change.

When speaking of Yugoslavia as a whole the economic sanctions have had a deleterious effect on the economic and political development of Serbia and, to a lesser extent, of Montenegro. A particularly severe negative effect has been the impoverishment of the former middle class and the intelligentsia which, in other post-Communist countries of South-Eastern Europe, have given strong support to the democratic and market-oriented parties. In addition to this, a realistically estimated 200,000 to 300,000 mostly young, educated people have left Serbia since 1991 in economic and social desperation. This has been a considerable blow to the forces which strive for democratic and market change. Taking all this into account it is no exaggeration to claim that, from a long-term perspective, the sanctions have created an extremely unfavourable social climate for the establishment of democracy, the rule of law and a market economy. The negative impact of these effects will be felt for a long time after the sanctions have been lifted.

Officials of the leading European countries which are members of G8, with the exception of Great Britain, recently presented their view that sanctions against Serbia should be lifted.

A united Europe will be difficult to achieve as long as there are sanctions in force against Serbia, given the country's central position on European trade routes. For example all Greek products are no more expensive because of increased freight costs. All European products are more expensive in Greece, Turkey and other markets because of the artificially imposed increase in transport costs. Textiles and other products from Romania, Bulgaria and other poor countries in transition are more expensive because the Danube navigation route is out of service. This has resulted in German and other consumers from the developed countries paying higher, rather than lower, prices.

The sum effect is to make European products less competitive on the world market than they would be if Serbia were not under sanctions, if existing Serbian roads were repaired and new ones built, if the Danube was navigable, if the railway network were serviceable.

G17Plus
3. Sonja Liht, Chairperson of the Fund for an Open Society, Yugoslavia
4. Aleksandar Lojpur, Coordinator of the Task Force on the Future of FRY, East West Institute,