Money and Markets: Essays in Honor of Leland B. Yeager

154 Maria Minniti and Lidija Polutnikrichest and most developed of the republics of Yugoslavia, arguments regarding“exploitation” by less developed republics and provinces also found fertile ground.As a result, political independence from Yugoslavia became a major part of publicdiscourse and the preferred path for Slovenia to catch up and become part ofWestern Europe.The loose monetary policy in Yugoslavia had caused consumer prices inSlovenia to grow at an annual rate of 1,253 percent between 1988 and 1989, and ata rate of 552 percent between 1989 and 1990. 9 Also, being one of the more exportoriented of the republics, Slovenia’s GDP had declined from $17.4 billion in 1990to $12.7 billion in 1991, a 27 percent decline. 10 Under pressure because of therapidly deteriorating economic situation of the late 1980s, the Slovene Parliamentvoted to hold a referendum on independence. While the economic rationale forindependence was a successful transition to a market system, political and populistarguments focused on Slovenian higher productivity, better work ethics, and on itsmore than fair contribution to the federation. At the referendum, held on December26, 1990, about 90 percent of the population voted in favor of independenceand Slovenia proposed the creation of a loose confederation among all Yugoslavrepublics. The ensuing negotiations, however, did not produce any result. Thus, onJune 25, 1991, the Slovene Parliament declared full sovereignty which ultimatelybecame effective after a three month moratorium on October 8, 1991.The Yugoslavian response was immediate and, on June 27, the Yugoslav armyinvaded Slovenia and took control of the country. Fortunately, the Slovenianpolitical leadership quickly created ties with the West and the intervention ofEuropean Community mediators prevented the invasion from developing into awar. Most of the other Yugoslavian republics had no clear political or ethnic identityand were, therefore, more vulnerable to external attacks or internal struggles. In asituation where the war had begun developing quickly on many fronts, a deeper andprolonged attack against Slovenia could have significantly endangered its existence.On July 7, a decisive agreement between all concerned parties and EC negotiatorswas reached and the war in Slovenia was avoided. Slovenia agreed to stop furtherimplementation of the declaration of independence for three months and theYugoslav side promised to end the hostilities and withdraw its army. Otherrepublics of the former Federation followed a different path and the formalsecession of Slovenia took place while a terrible war began to develop in the restof Yugoslavia. After three additional months of negotiations that yielded nopositive results, and in light of the disintegration of other parts of Yugoslavia,Slovenia resumed its plans and achieved complete independence by the end ofsummer 1991. 11While the independence process was taking place, it had become clear that thecredibility of the new government was a crucial factor for a successful transition toindependence. Such credibility rested on the government’s ability to nurturethe country’s self-confidence, reduce uncertainty, and restore sound marketincentives. Thus, macroeconomic stability was a necessary element for a successfultransition. 12 Macroeconomic stability, in turn, required monetary discipline.Many questions arose about how monetary discipline was to be created, and alter -native monetary arrangements were debated. Against the suggestions of foreign