06/25/2014 12:50 pm ET Updated Aug 25, 2014

The Misrule of Law in Croatia

The success of the free market reforms that took place in East-Central Europe after 1989 was predicated to a large degree on the rule of law. The privatization of state assets, for instance, required a high degree of transparency and a strong set of regulations. Otherwise corrupt individuals and groups could easily vacuum up the assets at low prices and make a killing.

Two decades after these initial economic reforms took place, most observers in the region acknowledge that the process was far from perfect. But some observers go further and believe that endemic corruption has fatally undermined economic and political structures, particularly in the Balkans. Natasha Srdoc, who has done stints in international banking, the think tank world, and politics, is a firm believer in free market capitalism. She doesn't think what took place in former Yugoslavia comes anywhere close to her understanding of how capitalism works.

"Croatia and the other countries of the former Yugoslavia have never experienced real free markets," she told me in an interview last April in Washington, D.C. "They were brought from full state-owned economies or mom-and-pop entrepreneurism to a very criminal capitalism where all of a sudden state-owned companies were being sold. Franjo Tudjman in Croatia, for example, had an idea that he was proudly promoting publicly: having 200 families own the whole economy. He succeeded in having families, some that were closer to him, get the wealth of the country. That has not been corrected, and we need to reverse that."

Together with Joel Anand Samy, Srdoc founded the Adriatic Institute, a thinktank in Croatia, to promote the kind of free-market capitalism that Milton Friedman advocated. Even Friedman, however, had second thoughts when he saw what had been done in his name in Eastern Europe. The economist had once famously offered the mantra of "privatize, privatize, privatize" as the only three polices that post-Communist countries had to follow.

"But one of the things that I truly give credit to Milton Freidman, who received the Nobel Prize in Economics, is that he admitted that he was wrong. And when we met him in 2004, he said he'd made a mistake," Anand Samy told me during the joint interview. "He told us, 'We took for granted that these countries would have institutions like the rule of law and independent judiciaries so that privatization would be done in a proper legal process, with transparency.'" Anand Samy cited a report that estimated, between 2001 and 2010, that $111.6 billion left the Balkans for foreign accounts.

The Adriatic Institute (AI) has focused on battling corruption in the region. Srdoc even ran in the Croatian elections in 2011 after forming a new center-right party with an anti-corruption and Euroskeptical platform.

"We thought that the EU was the best solution for Croatia and the countries of the former Yugoslavia, the best and fastest way to establish the rule of law, an independent judiciary, and the protection of property rights," Srdoc said. "We couldn't do it from within. We needed international pressure. I believed that in the process of accession, there would have been assistance by foreign judges and foreign prosecutors, and an effective system would have been in place to prosecute criminals and stop money laundering and retrieve some of the illicit financial outflows. We have not seen that happen. When you look at the entire process, Croatia just gave concessions to the EU. Croatia gave away its economic zone on the sea, which is protected by the UN Charter, which establishes a country's maritime economic zone up to a certain distance from the coast. Croatians could have kept it, sold it, leased it, or used it, but they would get the benefits of the economic zone. Instead, they gave away the economic zone on the sea. They also gave away the opportunity of growing grapes, which is a potential moneymaker. Chile, for example, started by exporting $60 million worth of wine in 1980s, and it went up to $1 billion by 2005. Croatia's politicians gave this opportunity away."

The Interview

Do you think there was anything that could have been done to avert the war internally within the former Yugoslavia and then anything that could have been done externally either by the Europeans or the United States or international organizations?

Natasha Srdoc: I come from Rijeka, the city port on the western side of Croatia. At that time in the areas bordering Serbia -- eastern Slavonia in Croatia and the area bordering the Bosnian Serb communities -- there were tensions among people that we really didn't feel in the western parts of Croatia. So I never thought that the war was possible. Or I thought that if there would have been tensions then they would have been alleviated by the international community, by the European Union or the United States. There would have been an intervention to stop any potential tensions leading to war. But I believe there was a purpose behind the war. The ethnic tensions were just a distraction thrown out there by politicians. It seems that there was a hidden agenda. It's also coming out now that the authoritarian regimes of Serbia and Croatia in the 1990s were looking at how to divide up Bosnia, which is also mentioned in Holbrooke's book. So, I'm not sure whether that could have been prevented from within because political leaders were pushing for the war.

But there should have been stronger pressure from the U.S. side early on. When you think about the lack of a timely reaction from Europe - it wasn't until the United States got involved that the war was actually brought to the end. Primarily the NATO military intervention in Bosnia in 1995 brought the sides to the table to sign a peace accord. The war should have been prevented in the first place through international pressure that would have upheld the Yugoslav constitution and allowed every then-republic to become an independent state. While the war was raging, the organized crime groups from Serbia, Montenegro, Croatia, and Bosnia and Herzegovina all remained inter-connected. There was an underground structure established that was involved in oil and arms smuggling and included intelligence networks, politicians, and their private partners in crime. This underground structure was never dismantled. The war profiteering proceeds were siphoned off to private bank accounts primarily in Austria and Liechtenstein.

One of the banks was Hypo Group Alpe Adria (HGAA), which was taken over by Bayerische Landesbank in 2007. At the time of this purchase, Prince Michael von Liechtenstein took control of HGAA's Liechtenstein's branch, thus sheltering the accounts of corrupt politicians and their private partners in crime, with bank secrecy. It wasn't just the profits from arms smuggling that went into these secret accounts. There was also a diaspora that was sending money and that money was not used for humanitarian purposes. This is an issue that we have to resolve. For the last 20 years, there has been money laundering going on with the money accumulated during the war and then through corrupt and phony privatizations and other aspects of illicit financial outflows and illegal trade. Those monies have been coming back to Croatia and other countries in the region in the form of investment in real estate and loans by HGAA without any collateral. It is political figures and their private partners in crime who are benefiting by getting such loans. A huge injustice has been done that has to be corrected. Now is the time to bring the culprits to justice and confiscate the illicit enrichment amassed by corrupt politicians ad their private partners in crime during the last 23 years. Maybe we won't be able to punish those responsible for the war itself, but by following the money we will be able to find those who benefited from the war and the post-war plunder. While real patriots were fighting and dying for their country these corrupt politicians were stashing money in their private accounts.

Joel Anand Samy: After World War II, we asked the question, will it ever happen again in Europe? And the world said, "No, we will never let this happen again. For so many millions of people to lose their lives because of the war and the aftermath was unacceptable." Yet in our lifetime, as reported in To End a War and a lot of other books, nearly 250,000 people lost their lives in the wars in former Yugoslavia. It was civilians primarily: children, women, elderly. This war was directed towards civilians, and we just basically allowed this to happen in our lifetime.

Your question was whether it could have been avoided, and in retrospect I think there were so many missed opportunities to bring this war to a halt or at least to reduce the impact or the adverse effects of what transpired. With all due respect, U.S. foreign policy was deeply flawed, with Secretary of State James Baker going only to Belgrade and not visiting other places and saying "we don't have a dog in this war." They realized that the economic issue needed to be resolved. Inflation was out of control, and things were just basically erupting. Yes of course there were concerns about the Soviet Union, the nuclear arsenal, and so on. But they basically dropped the ball on this one. The Bush administration was at fault, and very clearly Brussels and the European Union lost its bearings. They could have responded and saved so many lives: 250,000 lives lost in our lifetime in Europe's backyard.

On the other side, when you look at what Natasha was describing within Serbia, Croatia, and Bosnia, in a sense the worst really rose up to the top. People talk about the glorified transition from Communism to free markets, but all we saw was actually the transition from Communism to a very dark episode of war and plunder -- and now to a period of criminal enterprises and criminality. There really was no transition to the rule of law, to democratic institutions, to real free media. Look at the Balkan region today. Global Financial Integrity's report says that from 2001 to 2011 $17 billion in illicit financial outflows left Croatia for foreign accounts. Now AI and GFI are looking at the Balkan region's illicit financial outflows from 1991-1999.

For the Balkan region as a whole over that same nine-year period of time (2001-2010), $111.6 billion left these countries for foreign accounts. It not only hemorrhaged the economies of these various countries, but it blocked real reforms of the rule of law, protection of property rights, and the creation of an independent judiciary that could address issues of minority cases or the confiscation of property that took place during the days of Communism or during the war. As Natasha said, a tremendous injustice was done, and unfortunately today Brussels and Washington have a very flawed policy in addressing some of these issues. Yes, let's have these countries cooperate. But we need to deal with the very basic issues that could lead to the region not becoming the next Greece from an economic point of view. Principle, not expediency.

When you think back to your philosophy or your worldview circa 1989-90, almost 25 years ago, has anything changed in any major respect? Have you rethought any positions you had back then?

Natasha Srdoc: I remember those years because I initiated a court case against the city of Rijeka, Croatia. The city of Rijeka took the property of my family, a portion of that was mine as well, and so I was involved in the case. They took my property and sold it to other individuals. My worldview and philosophy of protection of private property rights, the rule of law, and the need for limited government as a means to obtaining individual liberty and curtailing corruption - I strongly held those principles then and now.

When did they take that property?

Natasha Srdoc: In 1989. Because of the fall of the Berlin Wall, the Communists anticipated that they might not continue doing business in their old corrupt ways. The Communists and political opportunists knew that new times were coming, that they may lose their benefits and positions, so they decided to take advantage of their last days in power (as it looked like back then) because nobody was going to challenge them. I just could not figure out how they could take my private property and sell it to other individuals. They took money from those individuals because they sold the property, and they haven't compensated me. This was a daylight robbery! There were other different cases in which many more families were affected. I rebelled and initiated a court case. The prevailing thought at that time was - the city can do that, because the city is the government and government can take away people's property. I decided to challenge this decision. It got a lawyer and went to court.

Every instance of this case demonstrates how private property rights were not protected, the rule of law subverted, and the court including the lawyer submissive to the authorities.

The city made an offer:, "We will give you 40 German marks per square meter at today's currency rate." With a one percent daily inflation rate, a 45-day deadline to pay the debt, and a subsequent 7 percent annual penalty rate, the value of the entire compensation could have been nullified in three months, paid out in one year, without any consequences for the city.

I said, "I want 40 German marks in the counter value of the Croatian kuna on the day of the payment."

They said, "No, we can't do that."

I brought an invoice showing that we were paying electricity based on the German mark counter value and pointed out, "The state-owned electricity company is using German marks, why can't you stipulate it?"

I clearly remember my lawyer saying, "This is not the American system. We don't have a precedent here." After firing the lawyer, I came to his office to provide the payment for his last service, when he requested 100 German marks. I gave him 100 German mark note and told him that we don't live in Germany.

So, that was a microcosm of the rule of law. The rules are set by men, and the same laws are not valid for everyone. The same sets of laws and regulation affect different people differently. We are still in the same situation today. There is no rule of law. Private property is not protected. The EU has pointed out, and we also raised this early on, that the legislative framework established in 1997 for the restitution of property confiscated during Communism favors the state and allows political corruption. Today, there are about one million cases backlogged in the Croatian court system. Some cases have been backlogged for more than 20 years. Most of them deal with property rights.

Individual rights, including property rights, are not protected in the same way as in Western democracies. My thinking about private property, the rule of law, government transparency, and accountability has not changed because of my personal experiences.

Joel Anand Samy: In terms of how our opinions have changed, I think back to how parents raise their children, the guidelines that they provide and what they instill: the importance of justice, of fair play, of giving, of responding to crisis and the needs of others. Those issues have not changed and those values have not changed. They have only deepened. We all have a responsibility as citizens not to just think of ourselves as taxpayers in this sort of very artificial confine. We as individuals do have a commitment to our society. If we do not take responsibility, we cannot point fingers at anyone else. Those values have remained the same. But the context of what has happened in the former Yugoslavia and in the former Soviet republics -- the post-Communist countries -- was best stated by Milton Friedman when he said "privatize, privatize, privatize." A lot of people said, "Lets take that path." But one of the things that I truly give credit to Milton Freidman, who received the Nobel Prize in Economics, is that he admitted that he was wrong. And when we met him in 2004, he said he'd made a mistake.


Joel Anand Samy: About this whole concept of privatizing. He told us, "We took for granted that these countries would have institutions like the rule of law and independent judiciaries so that privatization would be done in a proper legal process, with transparency." One of the things that Milton Friedman, along with others that were from a different perspective of thinking, stressed to us was: when you advocate for reforms, focus on the basics. Milton Friedman's message for Eastern Europe and former Yugoslavia was: "Firstly, the rule of law must be established," an issue which has been overlooked by the Western democracies.

When we think about reconciliation in the region and cooperation and all these wonderful buzzwords that are being communicated and backed by EU and U.S. taxpayer aid funding for these projects, we do not emphasize the basics. That probably has changed in my thinking. We should have supported a just intervention in the Balkans with the condition that we will provide taxpayer funding to the tune of a $100 billion over the past 15 years or so, but we will do so only if these conditions are met. We want these countries to be democratic, but there has to be that foundation of the rule of law. We missed an opportunity there. The West had an opportunity to assist and to provide the training. Visiting judges could have helped the good folk rise up to the top. However, we relegated those responsibilities to a very corrupt bunch of people. So what do you expect? More of the same.

One of the changes in the accession process for Serbia is supposedly a lesson learned by the EU, and that is precisely that none of these other reforms can take place until there has been the establishment of the rule of law and transparency. These chapters of the accession agreement have been put ahead of other chapters. But I hear from you that you are not enthusiastic about the European Union. First I'd like to hear what your chief criticisms of the European Union are and then what you think of this attempt by the EU to emphasize precisely what you are emphasizing, which is the rule of law.

To read the rest of the interview, click here.