Foreign Relations of the United States, 1981–1988, Volume X, Eastern Europe

253. Telegram From the Embassy in Yugoslavia to the Department of State¹

5616/Depto 3006.

Belgrade, June 9, 1988, 1127Z

SUBJECT

• Deputy Secretary Whitehead’s Meeting With Yugoslav Premier Branko Mikulic.

1. C—Entire text.

2. Summary: On June 7 Deputy Secretary Whitehead, accompanied by Ambassador Scanlan and members of the Deputy Secretary’s party met with Yugoslav Premier Branko Mikulic. The Deputy Secretary expressed U.S. support for the Yugoslav program of economic reforms and said that the U.S. would participate actively in helping Yugoslavia achieve its goals. Mikulic said that by January 1, 1989, a “revolutionary” new Yugoslav economic system should be in place. Mikulic said that Yugoslavia wanted to increase its trade with the technologically more developed countries and that its trade would be more and more oriented toward the West. He said that the imbalance in trade with the USSR was a serious burden on Yugoslavia and that there appeared to be little prospect of its early resolution. Yugoslavia was decreasing its share of trade with the USSR but it would continue to be present in these markets. End summary.

3. Prime Minister Mikulic expressed appreciation for the Deputy Secretary’s words of support at the U.S.-Yugoslav Economic Council (USYEC) meeting in Split. Mikulic said that the government’s program for economic reform was on track and that he was now more optimistic that it would be successful in achieving its objectives. Noting that U.S.-Yugoslav political relations are excellent and require no special commentary, Mikulic said he would like to make a few points on the Yugoslav reform program. He stated that after years of internal arguments the country had finally agreed that it was necessary to proceed with reforms which went beyond any yet seen in the post-war period. Mikulic said the government would have introduced its reform program earlier but there were divided opinions about reform last year and the country also lacked the prerequisites for reform. It was impossible last year to allow a liberalization of prices, as some had advocated, in view of Yugoslavia’s high debt service obligations. However, the government had decided to seek debt rescheduling and had entered into negotiations with the IMF. These eventually led to an agreement by which Yugoslavia corrected the mistake made in 1984 of ending its relationship with the IMF. This had been a difficult decision for Yugoslavia but there was no real alternative that would offer the people the hope of a better future.

4. The difficulties, however, had forced the government to devote considerable time to sounding out the public opinion and the social terrain before it proposed changes. Mikulic said that the initial results of the introduction of the changes had not been as bad as some had feared. The foreign exchange market is working and prices had not risen as aggressively as some had feared. The government would keep a firm grip on internal demand to keep the situation from becoming more difficult. Mikulic acknowledged that the government expected to face protests as it implemented the reforms but that it would not weaken. He noted that dissatisfied miners from the Bosnian town of Tuzla had recently marched on the assembly to complain about the government’s measures. There would be more protests in Yugoslavia but the government would “hold on.”

5. Mikulic said he was particularly worried about how to prevent distortions in the foreign exchange market. The GOY had originally agreed with the IMF that $1.4 billion in fresh money was needed; later that sum was reduced to $1.2 billion. This is a prerequisite for the operation of the foreign exchange market, which is a prerequisite for the liberalization of prices. Mikulic stated that on its first ten days of operation the foreign exchange market in dinars had been fairly weak. There had been a total turnover of $224 million. This showed that the government had set a realistic exchange rate. Yesterday, however, the government had decided to introduce a 5.1 percent “correction” in the exchange rate because of differences between domestic and foreign markets. Mikulic stressed, however, the importance of obtaining a secure supply of new money through the rest of the year. Achieving success in the government’s current economic policies is a necessary element of success in the broader program of economic reform. The economic reforms and constitutional changes that have been proposed represent a complete change in the Yugoslav economic system from top to bottom. Mikulic also described the changes as a real “restructuring.”

6. Mikulic said that the government had gotten full support for these changes from the recent conference of the League of Communists of Yugoslavia (LCY). There had been a decision to accelerate the enactment of the reforms and the constitutional amendments. Beginning January 1, 1989, Mikulic said, there will be a “revolution” in the Yugoslav economic system. Mikulic acknowledged that there would be resistance to these changes especially in areas which cannot adjust rapidly enough to the new conditions. It would also be necessary to overcome some “dogmatic” prejudices from the past that automatically tended to favor large enterprises with several thousand workers over smaller firms. Mikulic said that the reforms would encourage small and medium sized firms that are more flexible and could therefore survive more easily in the new conditions. That part of the economy that is successful and export oriented, Mikulic said, will support us. He added that such successful enterprises are found throughout Yugoslavia, and are not confined to one republic or another.

7. Mikulic said that Yugoslavia was aware it had to rely primarily on its own efforts to get out of the crisis but he also said he liked to think that the American Government supported the Yugoslav program. He added that Yugoslavia hoped for U.S. support during the upcoming meeting of the Paris Club. He also hoped that U.S. commercial banks would not be a problem. Yugoslavia expected to get $500 million from commercial banks but it would be even better if this could be obtained at an acceptable rate of interest. It was important for the success of Yugoslavia’s reforms to have sufficient money on hand at the outset of the program.

8. In response, the Deputy Secretary stated that he believed an important and favorable revolution was beginning in Yugoslavia. The Deputy Secretary said he wanted to convey U.S. congratulations to Yugoslavia in view of the courage Yugoslavia has shown to initiate this program. The Deputy Secretary predicted that in a few months, when they saw the benefits it brought them, the people of Yugoslavia would be enthusiastic about the program. Yugoslavia is unleashing the ability of its people in a way it has never done before. The Deputy Secretary said that the U.S. recognizes the importance of balancing the financing gap and also acknowledged the validity of what Mikulic had said about the need to free up foreign exchange markets. The U.S. intended to participate actively in helping Yugoslavia to achieve its program. The U.S. has committed an additional $50 million in CCC credits to Yugoslavia and it was participating with $50 million in parallel with the BIS bridge. Noting that he had met earlier in the morning with Yugoslav Finance Secretary Rikanovic, the Deputy Secretary said that Rikanovic had quickly become a respected figure and that he expected he would have success in the upcoming Paris Club negotiations.

9. Mikulic said that in the past the U.S. had supported Yugoslavia in times of difficulty and Yugoslavia had counted on U.S. support again this time. Mikulic continued that he wanted to point out that the reforms would also affect Yugoslavia’s position in the world economy. Yugoslavia wanted to increase its cooperation with the most scientifically and technologically developed parts of the world; in Europe this meant the EEC and the EFTA. Mikulic said that Yugoslavia has good trade relations with the USSR and Eastern Europe, but that the Yugoslav imbalance in payments with the USSR was a serious burden on the overall Yugoslav balance. This problem had been discussed with Gorbachev during his visit to Yugoslavia but so far there had been no resolution. As part of the overall Yugoslav reform program they were seeking a way to revise the method of settling trade accounts with Soviet and Eastern European economies. Mikulic said it looked as if Yugoslavia would in the end have to reduce trade with this part of the world, even though a significant share of Yugoslav exports had been oriented to these markets. Mikulic said Yugoslavia would again raise this problem with the USSR but there appeared to be little prospect of an early settlement. Up to now the Soviets had only offered goods that Yugoslavia did not need or that it exported itself.

10. Mikulic pointed out that the problem had arisen only because of a fall in world oil prices. It was not Yugoslavia’s fault. In the reverse situation, in 1981 when oil prices had increased, Mikulic noted, Yugoslavia had exported an additional $1.1 billion worth of goods to the USSR to keep the account balanced. In view of the difference in size of the economies of the two countries Yugoslavia believed it would be easier for the USSR to resolve the current $1.4 billion imbalance than it had been for Yugoslavia in 1981.

11. Whitehead thanked Mikulic for this information and said it would be to Yugoslavia’s benefit to become part of the world trading system. Soviet style closed economies did not require the same quality goods as did market economies. But if Yugoslavia could get its quality up to the world level it would have the potential for unlimited growth.

12. Mikulic responded that Yugoslavia believed its trade would be more and more oriented toward the West. Last year there had been an increase of 50 percent in Yugoslav exports to the West while the participation of the USSR and Eastern Europe in Yugoslav trade was reduced by 30 percent. Mikulic emphasized, however, that the East remained a significant market for Yugoslavia and that it would be present there in the future. It was in Yugoslav interest to import strategic raw materials from the USSR in the future, if this could be arranged. But Mikulic acknowledged that the Deputy Secretary was right in saying that Yugoslavia needed to increase the quality of its goods to meet the most demanding standards.

13. The Deputy Secretary stated that he had spoken the day before with Croatian Presidency Member Ante Markovic, who said he fully supported Mikulic’s measures. The Deputy Secretary said this was encouraging because it was important for Yugoslavia to be unified, but he added that it is also encouraging that the opposition wants to go faster, not slower, toward reform. Mikulic responded that the opposition, if that was what it should be called, should take note of what is really possible. The issue should not be politicized. The government had liberalized the foreign exchange rules but only when it had enough goods on hand to meet demand and only when it was in a position to liberalize imports. To act otherwise would have led to an escalation of prices. Mikulic concluded by stating that he was glad to hear that his friend Ante Markovic supports the government’s program now.

14. The Deputy Secretary briefly discussed the Moscow Summit. He stated that U.S.-Soviet relations were improving and that the meeting in Moscow had been an important step in this direction. The U.S. was interested in establishing stable relations with the USSR, avoiding the swings of the past. There had been steady progress in all areas of the four part agenda: human rights, arms control, regional affairs and bilateral issues. The Deputy Secretary said that these improvements would continue into the next administration as well.

15. Mikulic thanked the Deputy Secretary for the briefing. He said Yugoslavia fully supported the improvement in U.S.-Soviet relations. Mikulic said that Yugoslavia and the Nonaligned Movement (NAM) as a whole hoped that the issue of Third World debt could get the same kind of positive attention that had been devoted to arms control. This is a dangerous problem that if allowed to go unresolved for too long could threaten world stability. Mikulic expressed the hope that the Toronto Summit of the Seven could find some way to address this issue. The Deputy Secretary agreed that the problem was indeed serious. The U.S. believed that the best way to do so is for Third World countries to adopt reform measures as Yugoslavia has done that would encourage growth.

16. Moscow minimize considered.

Scanlan

1. Source: Reagan Library, Rudolf Perina Files, Subject File, Yugoslavia—Substance 1988 (1). Confidential; Immediate. Sent for information to Eastern European posts, Moscow, Paris, Rome, Vienna, and Zagreb.