By John Pomfret and Christine Spolar
Washington Post Foreign Service
Tuesday, August 22, 1995; Page A01

Ever since fighting inflamed the Balkans four years ago, the common wisdom has been that rebel Serbs and their allies in Belgrade would win the war for former Yugoslavia. A third of Croatia and nearly three-fourths of Bosnia was in their grasp.

Serbian President Slobodan Milosevic's dream of creating a "Greater Serbia" where all Serbs would inhabit one state was all but realized. Muslims and Croats were his victims.

Then came Operation Storm.

More than just a military victory, Croatia's blitz through the Krajina region along its border with Bosnia earlier this month marked a fundamental shift in the equation of power in the Balkans. By recapturing thousands of square miles of territory, Croatia's army took a major step toward achieving President Franjo Tudjman's goal of carving out a sphere of influence to rival that of his neighbor, Yugoslavia.

In economic benefits, the operation set the foundation for a boom by uniting Croatia and securing its sun-baked and tourist-friendly Adriatic Coast, where once threatening Serb forces have now been pushed well away. Yugoslavia's economy, already staggering under U.N. economic sanctions, has to support another 150,000 Serb refugees.

In the battle for international public opinion, Croatia has so far escaped serious criticism for Operation Storm despite increasing evidence of shootings of civilians and officially sanctioned arson of many Serb houses in the Krajina. International attention has focused on rebel Serbs, who are being charged with digging mass graves near Srebrenica -- a U.N. "safe area" in Bosnia that fell to a combined Yugoslav-Bosnian Serb assault in July.

Now Tudjman is jockeying blatantly to inherit the mantle of Marshal Tito, the half-Slovene, half-Croat dictator who ruled Yugoslavia for 35 years until he died in 1980. For years, Milosevic was the frontrunner in that race. In a remarkable claim at the title, Croatian state television issued a 90-minute video last week called "Croatia: Five Years of Freedom."

Tudjman, clad in a Titoesque white suit laden with enormous epaulets, is seen waltzing with his wife, opening the Temple of Croatian Culture and viewing a military parade from the backseat of a jeep. Using terms of praise once reserved for the father of modern Yugoslavia, Croatian officials laud him as "the Prometheus of the nation" and "the waker of the drowsing spirit of patriotism for our fatherland."

Western diplomats argue that the emergence of a successful counterweight to Serbia could stabilize the region, and they express hopes that Croatia's new-found power can bring peace to the Balkans. The United States in particular has supported a stronger Croatia. Although the U.S. government denied it backed Operation Storm, President Clinton said the lightning strike presented "a moment of real promise" for an end to the bloodshed.

Croatia's military offensive does give the Serb president one thing -- a major boost to his ideas of nationalism and ethnically defined states. With its victory and the departure of most of its remaining Serbs, Croatia became the "cleanest" state in what used to be Yugoslavia, apart from Slovenia, which never was ethnically diverse. In 1991, Croatia's 4.78 million people were 78 percent Croat. Now, demographers estimate Croatia is at least 90 percent Croat. Of its 1991 population of about 600,000 Serbs, only an estimated 130,000 remain.

Compared to Croatia, then, Milosevic's Serbia, with an estimated 6.4 million Serbs, 1.7 million Albanians, 345,000 Hungarians, 235,000 Muslims and 130,000 Croats, is a multi-ethnic state. According to the 1991 census, only 65 percent of Serbia's 9.8 million population is Serb.

"The simplification of the former leopard-skin pattern of the former Yugoslavia is being rapidly completed and so are the maps sanctioning it," wrote Jelena Lovric, a Croatian columnist. "Muslims in Bosnia, for example, will be given a tiny garden."

In addition, the victory of the ideas of nationalism and ethnic purity in a region where almost every family includes Muslims, Croats and Serbs will also strengthen the cause of authoritarianism and state control, Western and local officials predict.

As in Serbia, the electronic media in Croatia remain firmly in state hands. While once relatively diverse, the print media became less so last week with the ousting of the editor of one of the country's best-selling independent newspapers, Globus. A main reason was the newspaper's "lack of sufficient patriotism" in reporting Operation Storm, the fired editor, Denis Kuljis, said.

One of the keys to Croatia's rise -- and Serbia's fall -- has been the economy and Croatia's cultivation of its image abroad.

In 1992, the U.N. Security Council imposed economic sanctions on Yugoslavia -- now made up of Serbiaand Montenegro -- to punish it for backing the Serb land grab in Bosnia and Croatia. Although the sanctions were relaxed last year they have ravaged the economy of Serbia-dominated Yugoslavia.

While the international community threatened Croatia with sanctions in 1993 for supporting a war that pitted Croats against Muslims in Bosnia, they were never imposed, and the two sides signed a peace treaty in March 1994.

U.S. officials, concerned with creating a counterweight to Serbia, helped Croatia avoid sanctions in 1993. Ambassador Peter Galbraith led the U.S. effort to stop the Muslim-Croat war and helped hammer out a new mandate for the U.N. peacekeeping force in Croatia earlier this year. As part of the mandate, the U.N. Security Council passed a resolution recognizing Croatia's territorial integrity. Croatia used that Security Council resolution as a legal justification for launching Operation Storm.

Croatia's deft handling of international image continued with Operation Storm. One justification given for the attack was the saving of the isolated Muslim "safe area" of Bihac in northwestern Bosnia, then under assault by the Serbs. Less than two weeks before the start of the offensive, U.S. officials met with Croatians and Bosnians and encouraged Croatian military help for the beleaguered 180,000 people in Bihac.

"Croats have used collective guilt far more effectively than the Serbs," said Bogdan Denic, a history professor at the City University of New York. "They know how to play the game." The economic benefits of this "game" have been clear.

In 1991, for example, Serbia had a per capita gross domestic product of $2,330, about the same as Croatia. In 1993, the last year for which figures are available, that number sank in Serbia to $1,225. Croatia's jumped to $3,048 in 1993 and $3,132 in 1994.

A key factor in Croatia's turnaround has been remittances from its wealthy emigre community, which has been instrumental in the creation of a good army and the arms-embargo-busting purchase of weaponry including MiG-21 fighters, tanks, rockets and Western fire-control systems for artillery. In May, for example, the National Bank of Croatia reported foreign reserves of $1.6 billion, up from $600 million in 1993. While Yugoslavia's reserves are secret, Western officials say they have been sapped by the sanctions and amount to less than several hundred million dollars.

The World Bank and International Monetary Fund are ready to lend Croatia money; so is the European Union. Economists predict the country could soon enter the club of ex-Communist states, like Poland and the Czech Republic, with a bright economic future. Serbia, however is sinking into the pit of the ne'er-do-wells.

Living standards are on a clear downward spiral in Yugoslavia with each day belying official statistics that the country is holding its own against U.N.-enforced sanctions.

While the days of hyperinflation -- when annual rates of more than 300 million percent sapped the country's coffers -- have been controlled by a strict fiscal policy enforced by the Central Bank, times are hard.

Men and women of the gray economy dot the sidewalks of the Yugoslav capital, hawking a pathetic array of soaps, candy and Marlboros from footstools and plastic chairs. "I do what everyone else does here: I'm a smuggler," said Dejan Jovanovic, 24, a civil engineer who shuttles between Belgrade and Budapest to pick up a cache of chocolate and cigarettes.

But in Zagreb the picture is brighter. The Croatian capital is undergoing a vast face lift. The parliament building is getting a much-needed sand blasting and the main thoroughfare through the historic old town has been ripped up to make way for installation of new gas and electricity lines and a new tram track.

To the west, since the drive to recapture Krajina, Croatia's Adriatic coast is set for an explosion of tourist traffic that could bring billions of dollars a year into the economy. "We're just waiting for them to come flocking down," said Ivica "Johnny" Vincovic, a Croatian emigre from Queens, who returned to the picturesque coastal hamlet of Rogoznica this year to start a restaurant. "This place ain't no field of dreams."

Drazen Klanac and Romeo Stojanovic, both piano teachers, illustrate the increasing disparities in the two societies.

On any day in Zagreb, Klanac fills the cobblestoned street outside his second-story studio with tinkling piano sounds. He said his business is booming. "I used to think a lot about the Serbs, Serbia and their big victory," he said. "But I've forgotten all that now."

But Stojanovic, a father of two from Belgrade, lost his job at a school three years ago. Now he sells Gummi Bears, cigarettes and peanuts to whoever has the German marks to buy. Last week was so bad that he earned no more than $17 a day. "It starts to bother you," he said, of the interminable struggle to get by. "I survived a few years but I don't think I can do another winter."

If sanctions ended tomorrow, the most optimistic estimates say Yugoslavia could recapture its 1990 standard of living by 2000. More realistic estimates say that, at best, it will regain its economic status by 2005.

Goran Pitic, of Belgrade's Economic Institute, said Yugoslavia will have to struggle to find its way to the economic stability now enjoyed by its once poorer neighbors of Eastern Europe. While other countries took advantage of the fall of communism, he said, Yugoslavia lost its economic -- and perhaps more importantly its psychological -- edge to war.

Pomfret reported from Zagreb and Spolar from Belgrade.