22 The results calculated for 2000 do not appear to suggest large potential for an increase in intra-former Yugoslav republic trade, albeit with a caveat. There is significant variation in bilateral trade flows projected by gravity model for regional dyads due to lingering memories of animosities, Western embargo on FR Yugoslavia under the Milosevic regime and external assistance. Taken together, they continue distorting trade flows among former Yugoslav republics. As the case of Slovenia's trade demonstrates-the only former Yugoslav republic that succeeded to stay out of regional upheavals-they have had profound impact on trade flows. Slovenia's trade with former Yugoslav republics is close to its predicted potential.<sup>30</sup> The Croatian-Serb conflict, which was one of factors contributing to the demise of former SFRY, still looms large over their trade. Croatia's trade with FR Yugoslavia remains well below its potential (80% below the predicted level in 2000). On the other hand, circumstances unique to the emergence of Bosnia and Herzegovina have shaped its trade patterns. As expected, special relationships between Bosnia and Herzegovina's entities, the Federation of Bosnia and Herzegovina and Republika Srpska, with Croatia and FR Yugoslavia, respectively contributed to significant "over-trade" with both Croatia (56 percent above predicted trade level) and FR Yugoslavia (29 percent above predicted). Another factor contributing to Bosnia and Herzegovina 'excessive' trade with respectively Croatia, FR Yugoslavia and Slovenia is that foreign assistance funded most of its imports. GDP used in generating predicted flows does not include foreign aid. Imports were therefore well above the levels predicted by the gravity model. Last but not least, Western embargo on trade with FR Yugoslavia appears to be responsible for its actual trade with FYR Macedonia exceeding by 42 percent the level predicted by economic factors alone including transportation costs. Close political relations free of ethnic tensions, created a fertile ground for diverting FR Yugoslavia's trade to other partners.

Except for bilateral trade between Croatia and FR Yugoslavia, there does not seem to be much potential for growth resulting from the removal of existing trade barriers. While some trade may pick up (e.g., as noted above, Croatia's with FR Yugoslavia), trade triggered<sup>byeither</sup> Western assistance (Bosnia and Herzegovina) or Western embargo on FR Yugoslavia may actually fall with full normalization of external economic relations in the region. These developments will probably suppress FR Yugoslavia's 'over-trade' with FYR Macedonia at<sup>the</sup> expense of the growth in trade with the EU, Croatia and other partners with whom political considerations were responsible for the low levels in trade. As we discuss in the next section, the international experience corroborates the expectation that intra-former Yugoslav republic<sup>trade is</sup> unlikely to trigger economic growth in the region.

The inclusion of Albania changes the overall picture in terms of the 'gravity model' results. If one includes Albania, the aggregate intra-SEE-5 trade in 2000 remains roughly<sup>the</sup> same increasing US$34 million from US$1,549 million to US$1,583 million or merely<sup>2percent.</sup> But the predicted trade increases rather dramatically from US$1.9 billion<sup>to US$2.7billionor 43</sup> percent. In consequence, the ratio of actual intra-SEE-5 trade to potential trade<sup>fallsfrom82</sup> percent to 57 percent indicating the potential for growth of 70 percent rather than 22 percent<sup>asin</sup> the case excluding Albania.<sup>3</sup> ' Considering that Albania pursued autarchic policy of national self30 The actual level of Slovenia's trade with other former Yugoslav republics of US$1.8 billion was only 14 percent lower than the predicted value of US$2.1 billion.

31 Its trade in relation to the GDP, one of the major gravity model variable, is well below<sup>levelsforother</sup> countries with a similar GDP per capita-almost 40 percent lower in relative terms<sup>thanthat of Bosniaand</sup> Herzegovina. This contributes to much higher predicted levels of trade than the<sup>actual ones.Albania's</sup> major export following the collapse of communism was labor force. Remittances were the<sup>majorsourceof</sup> financing imports and domestic consumption. In consequence, the incentive to look for outside<sup>markets</sup> was somewhat diminished. For more see the country study on Albania in this volume.