BELGRADE -- Already reeling under triple-digit inflation, a wobbly leadership and violent ethnic rivalries, Yugoslavia is staring down the gunbarrel of its worst economic scandal since the communists took power after World War II.
Last week's resignation of Yugoslavia's vice president and the head of one of its largest commercial banks over a $1 billion fraud involving Agrokomerc, a state-owned agricultural conglomerate, has triggered the arrests of eight officials and another 40 persons are being considered for prosecution.
Resignations at such a high level are very rare.
The scandal compounds the problems of a country with $19 billion in foreign debts to the West, an inflation rate the highest in Europe at 120 percent, unemployment topping 14 percent, and a seemingly irresolvable conflict between majority Albanians and minority Serbs in Kosovo province that flared again this month.
'This is the biggest scandal yet -- for the moment. It will get worse,' predicted one Belgrade journalist. 'We are without leaders.'
It is described as the worst crisis to date in a country that has lurched from one crisis to another since the death of the beloved Josip Broz Tito in 1980. It was Tito who led Yugoslavia out of the Soviet orbit in 1948 and designed the country's Rube Goldberg system of competing and offsetting political departments that now threatens to dissolve in chaos without his sheer force of personal leadership.
Today's economic woes have precipitated a political crisis, exhibited last spring in a wave of illegal labor strikes unprecedented in this fractured nation of 23 million people. The federal government failed to press home the need for austerity and generally gave in to workers' demands for higher wages to offset soaring inflation, according to interviews with party and government officials in Belgrade.
The Agrokomerc affair involved the distribution of about $1 billion worth of promissory notes to some 60 banks without cash to back them.
'What particularly worries me is the fact that this ruins the reputation of our economic system and weakens trust in the Communist Party and the leaders of our country,' said France Popit, president of the Slovenian Republic.
The Yugoslav media, which has relentlessly reported on the scandal since it broke late last month, said the Agrokomerc fraud is only the tip of the iceberg because many other firms throughout Yugoslavia have printed similar notes without cash backing.
'The Agrokomerc scandal is the product of the economic, legal and political relations in the existing system,' said Kiro Gligorov, former finance minister and Yugoslavia's leading monetary system expert.
'Power negates the existing economic rules ... The powerful people feel they are representing the social property and think they have the right to decide on investments, taxes and contributions, regardless of the real income and the real economic situation.'
The scandal could be a crippling blow to the economic credibility of Yugoslavia, which in June was unable to pay some $240 million in international debts for the first time in its history. The debts were rescheduled through the International Monetary Fund and come due again in the next few weeks.
That scare prompted some foreign firms with joint investment agreements to pull out with their desperately needed foreign capital. Among them were the Italian clothing firm Benetton and Continental Grain, the U.S. company whose contract was valued at over $100 million.
'Bad news travels fast, particularly in the business world,' admitted Cedomir Kovacenic, assistant president of the Federal Committee for Energy and Industry, which is concerned with foreign investment. 'It led to a decline in joint ventures.'
The economic problems are based on even deeper political ones, going back to the creation of this 'nation of nations' under Tito after the war. His legacy is an unwieldly constitution -- longest in the world with 406 articles -- that provides for a loose federation of six republics and two autonomous provinces and a deliberately weak central authority, the antithesis of most communist systems.
His goal was to prevent the rise of challenger. But the end result is not one communist party, but eight -- not one government, but nine, including the federal level. All of them are further fractionalized by ideological and nationalistic differences among Serbs, Croats, Slovenes, Montenegrins, Albanians, Macedonians and a handful of other ethnic groups. The Albanian problem has recently turned toward armed resistance.
'The party is losing control. There is no ideological and political unity,' said Milovan Djilas, one of Tito's three top advisers, who broke with the leader and has become Yugoslavia's best-known dissident.
'Those IMF economists don't understand Yugoslavia. They are concerned with prices, wages, interest rates. But those are secondary problems,' Djilas said. 'The problem is the power: it is divided ideologically, on national levels. That is the main problem.'
Tito, who in 1948 led Yugoslavia out of the Soviet orbit and established Belgrade as a leader of the nonaligned movement, could -- and did -- bypass the constitution by mere force of personality.
'Tito created this system they are laboring under now, but the only way it can work is under him,' said a Western diplomat.
'Each republic and autonomous province has its own constitution. Now they are debating whether each should have its own hymn.'
Prime Minister Branco Mikulic, a tough administrator from the Republic of Bosnia-Herzegovina who took over Yugoslavia's revolving federal leadership last year, failed to take a strong stand against the wave of strikes over wages this spring.
'He came in with a lot of expectations and doesn't seem to have done anything,' the diplomat said. 'A month ago he declared, 'I will not resign,' so it makes you wonder when he's going to do it. But the consensus is he'll remain.'
It was also Tito who created Yugoslavia's unique workers' self-management system, in which workers govern themselves. The system has led to rampant inefficiency as laborers voted themselves wage increases with no relation to productivity, created meaningless jobs for colleagues, and attended endless management meetings.
With the government bent on implementing a program to force inefficient firms to go bankrupt beginning Sept. 30, the self-management system will face a major upheaval -- and perhaps a fresh round of strikes.
'There certainly will be big problems because there are a large number of companies that must adjust,' said Ljubisa Tatovic, director of the center for self-management of the Yugoslav Trade Union Federation.
'Self-management does not contain a magic wand to wave away our problems overnight.'