(28. June 2002.)

Mr. Chairman, Ladies and Gentlemen,

Significant economic growth, increase of exports and employment, as well as participation in intra-regional and regional networks, cannot be achieved without the inflow of foreign capital.

The objective of all countries and regions undergoing transition is to create an economic environment attractive to foreign investors. The Government of the Republic of Serbia is making great efforts to create and implement reforms in the shortest possible period, which would create preconditions for the fulfillment of this objective.

From this point of view, I consider as beneficial such programs and activities of the UN Mission in Kosovo and Metohia which may contribute to establishing market economy and lasting prosperity for all citizens in this region. Especially if they lead towards reintegration of economic activities. Economic cooperation is the best towards creating relationships based on mutual interest and towards gradual release of tensions in this region that would lead to achieving regional stability.

Kosovo and Metohia has a privileged status in the European Union and the Special Representative of the UN Secretary General has the authority to promulgate regulations relevant to economic development in an "abridged" procedure. I believe that, despite this comfortable position, UNMIK has a very difficult task. Kosovo and Metohia is a region burdened with problems that have accumulated over several decades, numerous specific features and controversies that cannot be overcome successfully by simple enforcement of existing arrangements.

The dominant difficulties are the local development factors, the existing degree of development, traditional inefficiency of the economic sructure, unsatisfactory education and qualification of the working force, damaged natural resources resulting from economic sanctions and war operations, security and freedom of movement, a great number of refugees and internally displaced persons, predominant illegal economy, high degree of criminal activity, unemploymcnt, pollution of the environment.

The economy of Kosovo and Metohija is still in crisis, although it manifests certain signs of revitalization. The average utilization of existing capacities is hardly 30%, and the rate of unemployment is about 70%, being one of the highest rates in the contemporary world. The official number of employed persons is 200.000 - 250.000. The average salary of employees financed from the KOSOVO consolidated budges is just over 125 EURO. Almost a half of the population of Kosovo lives on the brink of poverty, and 12% in extreme misery. Over the past three years a high number of retired persons has not received pension payments, while a great number of refugees and displaced persons has no income of any kind.

Ladies and Gentlemen,

Establishing market economy in line with European standards in the post-socialist countries requires democratization, rule of law, creating adequate institutional frameworks and general structural adjustments. Experience has demonstrated that political stability plays is decisive factor in making investment decisions by foreign investors.

The establishment of the Kosovo Assembly and Government is a significant step forward in implementation of democratic principles. Yugoslav and Serbian authorities support these processes and encourage the local Serb and other non-Albanian population to play an active role in their functioning.

Regretfully, in case of Kosovo and Metohija, the rule of law is far from being a reality, especially having in mind the brutal violations of elementary human rights, primarily freedom of movement and security of Serb and other non-Albanian communities. This problem cannot be resolved by permanent police and military protection, nor by temporary removal of protective points around areas with Serb and other non-Albanian populatton. which create an illusion of reduced inter-ethnic tensions.

A portion of the population of Kosovo and Metohija still lives in fear of intimidation, incidents or brutal attacks by extremist Albanian groups. Property rights of physical and legal persons who are outside Kosovo and Metohija, as well as the right to work, are also in jeopardy. An adequate judicial system has not yet been established, meaning that there is not even a minimum of protection of citizens or economic entities.

UNMIK and the European Union are introducing a system of regulations and measures to increase the investment rating of Kosovo and Metohia. The policy of low tax rates with comprehensive tax basis is being enforced. A deeply rooted illegal economy representing over 80% of the total economic activity is a major challenge for UNMIK administration, much like a very high rate of criminal activities and smuggling of all kinds of goods (narcotics, arms, cigarettes, fuel, etc.) all the way to very widespread trafficking in people. All of these activities result in creating very significant funds of dirty money under the control of criminal leaders and their groups.

By taxes, customs duties and excise taxes different from those in surrounding regions, UNMIK is influencing the trade of goods and also encouraging unwanted trading of certain goods.

Non-existence of a stable and strong financial and banking sector is being compensated by investments by great multilateral institutions. Significant funds are allocated to the reconstruction of destroyed facilities and infrastructure, and such funds are currently being re-directed to economic programs. However, a related problem is that regions with Serb and other non-Albanian population have so far been completely excluded from such processes. Bank loans are expensive and individual investments are low - which is an indication of lack of confidence on the side of creditors.

Ladies and Gentlemen,

Privatization as a method of (necessary) restructuring of the economy has become official by the recent promulgation of a regulation to establish the Kosovo Trust Agency to manage the Kosovo enterprises, and a relevant Chamber within ihe Supreme Court of Kosovo. It is obvious that the establishment of a new economic structure is indispensable to initiate a new investment cycle and to activate economic resources. It is surpnsing, however, that by the adopted model UNMIK is violating two essential principles of market economy: the protection of creditors and respect of contracts.

It is not logical that the Republic of Serbia should service obligations of Kosovo enterprises to foreign creditors, amounting to over 1.4 billion USD, while at the same time it is not being consulted about the process of privatization in Kosovo and Metohia. It should not be overlooked that the Republic of Serbia collects no revenues from Kosovo and Metohia, while it is expected to service its debts. The proposed establishment of new enterprises out of the old, existing ones, and their sale to interested investors, without taking into account their existing obligations and property rights, is absolutely unacceptable.

The Government of the Republic of Serbia did not agree with such an approach. Instead, it proposed that in cooperation with UNMIK acceptable solutions be found, or that the privatization model which is being applied in Serbia, and which has been highly appraised by international experts, be applied in Kosovo. The Government of Serbia, as the majority creditor, as well as numerous banks and enterprises from Serbia proper and Vojvodina, are being put in an unfavorable position of suffering ihe consequences of being unable to collect their realistic receivables. Besides, the UNMIK model of privatization does not address the issue of employees, which I believe is not acceptable to the Albanian population either. The model also ignores the fact that, before March 1999, these enterprises were multi-ethnic.

A hasty adoption of regulations providing for market economy and attracting foreign capital need not be a sufficient guarantee for achieving economic growth or prosperity. It is necessary that within a comprehensive structural adjustments a balance be achieved between available natural, spatial, demographic and environmental development factors, which, in the case of Kosovo and Metohija are characterized by numerous limitations.

It is obvious that UNMIK is making efforts to provide a privileged economic environment for Kosovo and Metohia. In principle, this is nothing new in this region. During the previous decades Kosovo and Metohia has constantly had a privileged status, especially within ex-Yugoslavia, but also in receiving loans from the World Bank and other international institutions. The development of Kosovo and Metohia was fully financed from external sources. Its own participation in investment funds did not go over 10%.

Yet, this region did not manage to overcome underdevelopment. Enormous investments in infrastructure and economy did not nearly yield expected results. On the contrary, the gap in the level of development between this region and other ex-Yugoslav republics was constantly increasing. The reasons for this could be in the notorious inefficiency of non-market socialist economy, but also in high rates of demographic investments which absorbed a great proportion of the national product.

At present there is a decreasing trend in the rate of natural population growth, but it is still at a very high level. The effects of this trend may become visible in the long term, if they are not neutralized by uncontrolled influx of Albanian population from surrounding republics. This, too, is a part of the Kosovo reality. Generally speaking there are obvious intentions of UNMIK and the European Union to compensate for structural inefficiencies and the lack of comparative advantages of Kosovo and Metohia by providing for it a privileged status. There are, however, limits to which the burden of transition can be transferred to the direct environment. In this case, primarily and again to the Republic of Serbia, its citizens and economic actors.

Ladies and Gentlemen,

I wish to believe in the good intentions of the international community and I wish their mission in Kosovo to be a successful one, but experience so far burdens us with certain doubts and concerns, of which I would emphasize the following:

• If we wish to encourage integration processes within the region and towards the European Union, which we undoubtedly do, why are the UNMIK proposals based on different standards when dealing with Kosovo and Metohia than when dealing with the rest of Serbia. The implementation of such proposals actually leads to disintegration. This, in my opinion, is irrational and unnecessary, especially if it is to be followed by insisting on mutual harmonization of regulations.
• There are no rational justification for adoption of UNMEK. rcgulations without prior consultations wiih Serbian or Vugoslav authorities that are supporting a conslructive approach in creating an cconomic and dcvelopment environment. Both the Govemment of the Republic of Serbia (appraised as successful by the international community) and UNMIK arc implementing reform policies, but cooperation so far has been selective and litpitcd to only a minor number of issues.
• Does this reflect just a wish for a quicker accession to the European Union, or has UNMIK been forced to give in to the pressure exerted by Albanian political leaders for the creation of independent Kosovo by all means, including economic ones. UNMIK's management of the economy and other vital economic sectors on micro level, without considering all regional interests, primarily the interests of Serbia might weaken the economic position of Serbia in the international market competition, which could lead to further destabilization in the region.
• Will the UN mission in Kosovo and Mctohia manage to prevent the influx of dirty money and its laundry through the privatization process? In a situation where there is no legal security, with complex and unresolved property issues, it would be unrealistic to expect the arrival of respectable foreign investors.

It could be supposed that such an environment will retain and attract capital of doubtful origin and intentions. This could be a serious obstacle to lasting stabilization of Kosovo and Metohia and the region as a whole. Under such circumstances it would be an illusion to count with considerable capital investment by foreign partners. It would therefore be much more realistic and acceptable to adopt an option in which significant foreign investments in a single Kosovo and Metohia would be preceded by creating a modern multi-ethnic society based on contemporary democratic principles. This can not be achieved without the free return of refugees and internally displaced persons to their homes and their integration in all democratic processes in Kosovo and Metohia.

Thank you for your attention.