This paper was prepared by the staff of the International Monetary Fund and the World Bank in Washington, DC. The main authors are Saumya Mitra (World Bank) and Dimitri G. Demekas, Johannes Herderschee, and James McHugh (IMF). The paper has benefited from extensive contributions by Abe Selassie (IMF) and Daniela Gressani (World Bank); comments and background material by the IMF and World Bank country teams on Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Romania, and FR Yugoslavia; and comments by the European Commission, the European Bank for Reconstruction and Development, the Organization for Economic Cooperation and Development, and the Stability Pact. IMF and World Bank staffs acknowledge, in particular, the helpful comments and insights provided by the authorities of the countries of the region. Research assistance was provided by Amber Hasan (IMF) and Zhicheng Li (World Bank). The views expressed in the paper do not necessarily correspond to those of the IMF or World Bank Executive Boards. This paper does not examine the social impact of the Kosovo crisis. The strategy to address the social consequences of the conflict by promoting social cohesion and social change has been laid out in "The Road to Stability and Prosperity in South Eastern Europe", prepared by the World Bank for the First Regional Conference for South East Europe, in March 2000.

Table of Contents

1. Introduction

2. The Kosovo Crisis: Impact and Policy Response
   1. The region before the crisis
   2. The Kosovo crisis
   3. Domestic policy response
   4. The contribution of donors

3. Building Peace: Prospects and Policy Challenges for South East Europe
   1. Macroeconomic stability
         The current macroeconomic situation, near-term prospects
            and risks
         Macroeconomic policy challenges
   2. Governance
         Management of public finances
         Corruption and economic crime
      
   3. Economic integration with the global economy through trade and investment
         Trade liberalization
         Regional trade integration
         Foreign direct investment
      
   4. Private sector development
         The legal and regulatory framework for business
         Privatization and private sector participation in the provision
            of public services
         Development of small and medium-size enterprises (SMEs)
         Financial intermediation

4. Final Observations

List of Boxes:

Box 1:	Progress with transition in the region before the Kosovo crisis
Box 2:	Initial estimates of the impact of the Kosovo crisis
Box 3:	The Memorandum of Understanding on Trade Liberalization and Facilitation

List of Tables:

Table 1:	Main Macroeconomic Indicators
Table 2:	External Trade
Table 3:	IMF Outstanding Purchases and Loans
Table 4:	World Bank Lending and Grants, from 1995-2001
Table 5:	Direction of Trade, Export shares (1995-2000)
Table 6:	Direction of Trade, Import shares (1995-2000)
Table 7:	Description of Trade Barriers
Table 8:	Trade Agreements
Table 9:	International Taxes