The Yugoslav Economic System and Its Performance in the 1970s [Not Stated] 0877251444, 9780877251446

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The Yugoslav Economic System and Its Performance in the 1970s

LAURA D’ANDREA TYSON

I S INSTITUTE OF IN TE R N A TIO N A L STUDIES University of California Berkeley

RI SI ARCH SKRIHS. NO 44

The Yugoslav Economic System and Its Performance in the 1970s

LAURA D’ANDREA TYSON

I S INSTITUTE OF IN TE R N A TIO N A L STUDIES University of California Berkeley

Library of Congress Cataloging in Publication Data Tyson, Laura D'Andrea, 1947The Yugoslav economic system and its performance in the 1970s. (Research series - Institute of International Studies, University of California, Berkeley ; no. 44) Bibliography: p. 1. Yugoslavia—Economic policy—19452. Employees' representation in management—Yugoslavia. 3. Yugoslavia—Politics and government—1945L Title. II. Series: California. University. Institute of International Studies. Research series ; no. 44. HC407.T97 338.9497 80-24650 ISBN 0-87725-144-4 © 1980 by the Regents of the University of California

CONTENTS

Acknowledgments INTRODUCTION 0 S " THE NEW INSTITUTIONAL FRAMEWORK: THEORY ^ J ^ T H E NEW INSTITUTIONAL FRAMEWORK: REALITY , ^

IH ^ E C O N O M IC PERFORMANCE AN D DEVELOPMENT: THE DECADE OF THE 1970S

[JV T V. *, VL VIL

vii 1 3 10

31

REGIONAL DEVELOPMENT PROBLEMS

62

PROBLEMS IN AG R ICULTUR AL DEVELOPMENT

70

MACROECONOMIC PERFORMANCE ISSUES IN FOREIGN ECONOMIC RELATIONS

• yVJHT^SOME CONCLUSIONS

REFERENCES

74 87 101

109

ACKNOWLEDGMENTS

I am appreciative of helpful comments on an earlier draft pro­ vided by Stephen Sacks and Benjamin Ward, and of the research assistance of Peter Cory, funded by a research grant from the Insti­ tute for Business and Economic Research, University o f California, Berkeley. The research for this study was completed while I was a National Fellow at the Hoover Institution, and I am grateful for its support.

L. D. T.

vii

Within this one country you have a microcosm of the world’s problems. You have the North-South problem between the prosperous and the poverty-stricken, you have the East-West political and cultural splits, you have the energy problem and you have the problem of devel­ oping an underdeveloped country. ” Western banker quoted at 1979 IMF meetings in Bel­ grade; quoted in Los Angeles Times, 10/22/79. We are confronted with the question of why almost exactly the same problems and weaknesses arise in our economy, year after year. Tito; quoted in Ekonomska Politika, 11/27/78. I have heard many Yugoslavs ridicule or criticize their system; yet, paradoxically, most of them seem to support it. A Yugoslav journalist I knew explained why, despite all their misgivings about the chaotic and con­ stantly changing experiment, most people were grudging­ ly for self-management. “It is not important whether it works or not,” the journalist said. “What is important is that whatever personal freedoms we enjoy rest on our self-management. What is the alternative? A return to Eastern-type centralism?” Dusko Doder, The Yugoslavs (New York, 1978), p. 169.

INTRODUCTION

More than three decades have elapsed since Yugoslavia, uni­ laterally expelled from the international Communist community by Stalin, began to map out its independent road to socialism under the leadership of Marshal Tito. During this period, despite rapid and continuous development and change, thejbasic elements of the Yugo­ slav economic and political model have remainedTundamentally the jame. In the economic sphere, workers* self-management at thfTen^crpnse level and a market system guided by varying degrees of state f anning at the macroeconomic level have continued to be the insti­ tutional forms on which-LheiY• i i*mn"m r v i c i J 11 J T ,'1' 1

THE YUGOSLAV ECONOMIC SYSTEM IN THE 1970S

sphere, unchallenged control by the League o f Communists o f Yugo­ slavia (LC Y) combined with growing sensitivity to pressures from an ethnically diverse and sometimes antagonistic population have shaped the particular blend o f party dominance and pluralism that characterizes the Titoist model. Finally, in international economic and political affairs, a continued policy o f nonalignment, bom out o f the Yugoslav search for viability without bloc membership in a world o f superpowers, has allowed Yugoslavia to maintain political and economic relations with both East and West while building an inter­ national reputation that enables it to exert a greater influence than its size and geographical position would seem to warrant. Although there has been a basic continuity in the Yugoslav system, there has been rapid institutional change—particularly in the economy and, to a lesser extent, in the political system. At no time has such change been more pronounced than in the 1970s, dining which a new constitution and a vast number of new laws have intro­ duced a variety of new institutional forms. Yet despite these changes, major problems have remained unresolved and have even intensified in recent years. The apparent paradox between rapid institutional change and the persistence o f certain economic and political difficulties underlies the analysis of recent economic and political developments in Yugo­ slavia presented in this study. Several questions will be considered. First: What major institutional reforms have been introduced, and what economic, political, or other difficulties have they been designed to alleviate? In the examination o f this question, economic diffi­ culties that appear to be endemic to the particular blend o f workers’ self-management and market socialism that characterizes the Yugo­ slav system will be distinguished from difficulties that appear to be consequences of other factors, such as Yugoslavia’s level of socioeconomic development, the regional conflicts and rivalries within the Yugoslav state, and external economic and political developments over which Yugoslav policymakers have little or no control. Second: To what extent have the proposed reforms been realized in practice? Third: Which reforms have failed to achieve their objectives, and why did they fail? Fourth: How has the Yugo­ slav economy performed over the 1975-79 period, during which many o f the institutional changes have been introduced? Fifth (and finally): What are the prospects for Yugoslav economic performance and further institutional change during the 1980s? After each of these questions has been considered, some general conclusions will be drawn concerning the Yugoslav experience. 2

I THE NEW INSTITUTIONAL FRAMEWORK: THEORY

The economic experience o f Yugoslavia in the 1970s has paral­ leled its experience in earlier postwar decades: fairly rapid growth, marred by persistent problems o f inflation and unemployment; structural change and modernization, reflected in the gradual trans­ fer o f the population from traditional peasant agriculture to other sectors of economic activity; and experimentation with new insti­ tutional forms designed to further the objectives o f workers’ self­ management and market socialism. As in the past, so in the 1970s, both economic goals and policy proposals for their attainment have been shaped by interrepublican or “ nationality” controversies. These controversies culminated in the paralysis o f economic policymaking at the federal level at the beginning of the decade, necessitating major constitutional reforms accompanied by a consolidation of the LCY and a strengthening o f its direct role in the economy. While these institutional changes were largely motivated by Tito’s desire to lay the groundwork for a political system that would survive him and solve the “ succession” problem, political pressures for re­ forms were reinforced by economic pressures. During the early 1970s there was a growing disenchantment with the “ excessive” dependence on the market forces that had been unleashed by the 1965 economic reforms. In the opinion o f many political and economic leaders, the market system failed to live up to expectations: growth over the 1965-70 period was less than antici­ pated, inefficiencies in the use o f capital and labor continued, and foreign trade bottlenecks persisted. In addition, the market seemed to produce consequences that had not been bargained for: a de­ terioration in the tradeoff between growth and inflation, an apparent increase in inequalities both among regions and among individuals and enterprises within a given region, and a perceived concentration of economic power in the hands of financial institutions, the mana­ gerial elite, and wholesale, retail, and foreign trade enterprises. These last two tendencies were seen to be at odds with the long-range goals of socialism. 3

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

To a great extent, the failure of the market in Yugoslavia was not the result o f excessive reliance on the market mechanism per se, but rather o f excessive reliance on a set of markets distorted by re­ gional barriers to the free flow of goods and factors of production, by persistent but uneven price controls, and by ad hoc interventions in market activity by government organizations, especially at repub­ lican and communal levels. Indeed, Branko Horvat, a noted Yugoslav economist, argued that by 1972 enterprise autonomy and market ex­ change were more restricted than at any time since 1955, due to government meddling in enterprise affairs, particularly at the local level (Horvat 1974). The ad hoc, local nature o f policy intervention reflected the fact that there was a lack of agreement at the federal level on both the objectives of economic policy and the policy in­ struments needed to realize such objectives. The resulting situation was aggravated by the absence of effective macroeconomic measures critical to the successful operation o f a market system. Such measures could not be instituted in Yugoslavia because their introduction and implementation were blocked by deep-seated divisions among re­ publics and autonomous provinces. In theory, the market mechanism in Yugoslavia was guided by a system of five-year plans. In practice, however, because the govern­ ment lacked the tools to guarantee the achievement of plan targets, the plans tended to function more as statements of government goals than as blueprints for action. Efforts to implement plan targets were limited mainly to selective monetary policy, government subsidies and government investment funds to encourage priority sector de­ velopment, and selective allocation o f foreign exchange. Since gov­ ernment funds financed about 18 percent of total fixed investment between 1965 and 1970, their use undoubtedly influenced the ex­ tent to which some individual plan targets were realized. Even in investment allocation, however, the planning mechanism and related policies were not successful, and there was widespread concern over governmental inability to coordinate investment programs, with con­ sequent duplications and inefficiencies in the use of scarce invest­ ment resources. By the beginning o f the 1970s, many policymakers desired a rehauling of the economic system that would strengthen planning and reduce the market’s role in resource allocation. The confluence of economic and political pressures in the early 1970s served as an impetus for the new institutional reforms that were gradually introduced over the course of the decade. Para­ doxically, pehaps, given the nature of Yugoslavia’s economic prob­ lems, these reforms produced a noticeable transfer of policymaking 4

THE NEW INSTITUTIONAL FRAMEWORK: THEORY

authority from the federation to the individual republics and auton­ omous provinces. Moreover, in many areas where federal authority was maintained, the new procedures required prior consultation with and approval by republican and provincial governments before federal action could be taken. Perhaps the major institutional innovation accompanying this transfer of authority was the introduction o f so-called social com­ pacts as the vehicle for interrepublican agreement. Social compacts are agreements concluded among government organizations (socio­ political communities) or between government organizations and other agents in the economy, including enterprises, chambers of business, and trade unions. They are best described as statements about policy objectives in certain areas of “ general social interest,” such as planning, prices, income distribution, international trade, and employment, and they are used in lieu of state laws to regulate eco­ nomic activity in these areas. By their nature they are not legally binding, but the parties who conclude a compact are expected to undertake the policy measures required for the realization o f its stated policy objectives; the only sanctions for failing to do so, however, are “ moral and political ones.” * The system of social compacts has been combined with a sys­ tem o f so-called self-management agreements (SMAs). In contrast to social compacts, SMAs are binding, contractual agreements signed by economic agents for the realization of specific policy objectives. Pos­ sible signatories to SMAs include government organizations, enter­ prises or their constituent divisions (called “ basic organizations o f associated labor” [BOALs] —described below), trade unions, and chambers of business. The combinations of signatories vary from agreement to agreement, depending on the nature of the contractual arrangement. The binding character of SMAs stems from the fact that if one or more participants in an SMA fail to meet their con­ tractual obligations, the other participants can propose its dissolu­ tion and demand compensation in a “ court of associated labor.” By design, social compacts and related SMAs have substituted for the direct coordination o f economic policy by government agen­ cies. For example, during the 1970s they have been the mechanisms for the introduction o f price controls and incomes’ policies in the economy. They have also been accorded a crucial role in the new *Leon Gerskovic argues that many social compacts have been ineffectual because their signatories have failed to adopt the requisite policy tactics (Gersko­ vic 1976, p. 23). This would explain in part the failure of social compacts on “incomes* policies*’ to slow the rate of inflation. (See Section VI below.) 5

THE YUG O SLAV ECONOMIC SYSTEM IN THE 197 OS

planning system. In theory, at least, this system is radically different from the one that preceded it.* The earlier system was one in which economy-wide indicative plans were formulated by government planning agencies to guide enterprise decisions by providing consis­ tent projections of government and sectoral activity. In contrast, the new system requires that plans be drawn up by enterprises and government agencies, that they be “harmonized” by mutual consul­ tation and adjustment, and that they be made binding by a set o f social compacts and SMAs. The new planning process begins with an obligatory exchange of information by all enterprises and government agencies on their prospective plans and their current economic situations as measured by a predetermined list o f indicators. A period o f “ harmonization” then follows during which all affected parties seek to agree upon a set of consistent plans. In theory, harmonization is simultaneously carried out at several different levels. Enterprise plans are harmo­ nized by enterprise-to-enterprise negotiations—first in the republican “ Associations,” which represent all the enterprises in a given sector or industry, and second in the republican Economic Chambers, which consist of representatives from each Association and are designed to provide for the exchange o f information between various sectors of production.^ Government plans, in turn, are harmonized by com­ munication among various levels of government—for example, be­ tween republican government organizations and between socio­ political organizations within republics.** In addition, these govern­ ment plans (“ social plans” ) are communicated to the Economic Chambers, where there is an attempt to harmonize them with de­ veloping sectoral and enterprise plans. In theory, this process of in­ formation exchange among planning units at different levels of the planning hierarchy—akin to what James Meade (1970) has dubbed a *This discussion draws on the exposition of the new planning system de­ scribed in a recent IBRD study by Schrenk, Ardalan, and El Tatawy (IBRD 1979). ^All enterprises are mandatory members of an “Association” of a particular industry organized at the republic and/or federal level. The “Associations” in turn form “Economic Chambers.” Both institutions are viewed as part of the self-management structure of the economy, and the government is not involved in any direct way in their proceedings. Both institutions are based on the prin­ ciple of consensus rather than majority rule: majority decisions are not binding on dissenting members. **The sociopolitical organizations include the LCY, the Socialist Alliance, the trade unions, the Youth Federation, and the Association of Veterans.

THE NEW INSTITUTIONAL FRAMEWORK: THEORY

tremendous “ higgle-haggle” in his book on indicative planning—will lead to the development of consensual enterprise, sectoral, and government plans that are feasible in the sense that all participants are willing to adhere to them. Acceptance of these negotiated plans is then codified in related social compacts and SMAs that bind their signatories to take actions consistent with their plans. The social compacts design and coordinate government policy efforts to see that the targets agreed to by enterprises in the related SMAs are realized. For example, some of the social compacts for the 1976-80 plan specified preferential credit, tax, afid import policies to be intro­ duced by various government agencies to promote the realization of growth and investment targets in so-called priority sectors, identified for their special importance in the development of the economy.* The institutional reforms o f social compacts and SMAs and the new system of planning have reorganized the machinery for economic decision-making at the government level. Related reforms have modi­ fied the machinery for decision-making within the enterprise. The] overriding goal o f this second batch of reforms seems to be a greaterj realization of self-management rights by workers and a corresponding ; moderation o f “ excessive” control by managerial forces. The 1976J Law on Associated Labor, which has been called a mini-constitution for Yugoslavia, describes both the intra-enterprise and the inter­ enterprise structures that have been introduced in pursuit o f this goal. Each enterprise is now composed o f so-called basic organizations of associated labor (BOALs). A BOAL can be established for any group of workers whose work results can be evaluated independently of the results o f other workers. Relationships among BOALs within an enterprise are formulated by voluntary intra-enterprise SMAs. Thus, the rules o f enterprise behavior are set down by bargaining among BOALs, each of which has its own workers’ council, its own assets, and its own income, which it distributes as it sees fit. The SMAs within the enterprise regulate the distribution o f its earnings, provide for joint capital investment, collective consumption and other matters of common interest, and define the responsibilities *

For an identification of priority and non-priority sectors in the 1976-80 plan, see Section III below. The Law on Social Planning stipulates that when consensus planning among participants proves impossible for priority sectors, the sociopolitical communities can introduce appropriate measures to see to it that desired objectives are achieved. There is no similar provision for non­ priority activities, for which consensus planning is encouraged but not man­ datory. 7

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

of the various self-management bodies. Associations of BOALs can delegate some of their powers to central administrative and self­ management bodies o f the enterprise, but decisions involving the distribution of personal incomes, investment, and collective con­ sumption are subject to ratification by individual BOALs. At the same time, these decisions must conform to the relevant social com­ pacts in force. The independence of BOALs in the formation of enterprise policy is designed to weaken central administrative control, thereby permitting workers to exercise their self-management rights on a basis o f equality. Undeniably, this model o f enterprise organization carries with it potential threats to efficiency because of excessive de­ centralization and the possibility of stalemate in the decision-making process. To counter these threats, the sociopolitical organizations within the enterprise, especially the trade unions and the party (the LCY), are responsible for developing and enforcing resolutions to intra-enterprise conflicts that cannot be resolved by regular pro­ cedures. The role accorded to the party in fostering enterprise decisions reflects a general characteristic o f the reforms of the 1970s. Overall, these reforms decentralized decision-making power: within the government they decentralized policymaking authority from the federal to the republican and provincial levels, and within enter­ prises they decentralized authority from central management insti­ tutions to BOALs. An important centralizing force was operating simultaneously with these decentralizing trends, however—namely, the consolidation o f the LCY and the broadening o f its direct policy role in many areas of economic activity. In the new institutional system, the LCY was restored as the final authority over all other decision-makers. This authority would be exercised through its direct participation in all the institutions o f the state and of self­ management down to the BOALs, the lowest level o f enterprise organization. Further indicative of the party’s new formal authority, the 1974 Constitution broke all precedents by providing for the LCY’s direct representation in government bodies—the collective State Presidency and the communal, republican, and federal assem­ blies [Rusinow 1977, p. 14]). Thus the reforms of the 1970s contained two contradictory trends. On the one hand, they provided for the further development of plural institutions and decentralized loci of decision-making power, elaborating a complex set o f checks and balances. On the other hand, they expanded the role of the party to arbitrate among pluralist 8

THE NEW INSTITUTIONAL FRAMEWORK: THEORY

interests or, in the words o f Eduard Kardelj, to act as an “ essential factor o f stability and cohesion” in Yugoslav society (Kardelj 1973, p. 114; quoted in Rusinow 1977). In the metaphorical language used by two recent observers of the Yugoslav situation, the reforms explicitly recognized the LCY as the “ institutional glue of the pluralistic system which they created” (Comisso 1978, p. 16; Shoup 1977, p. 1).

II THE NEW INSTITUTIONAL FRAMEWORK: REALITY

1. SELF-MANAGEMENT AGREEMENTS AN D SOCIAL COMPACTS

The institutional reforms of the 1970s were designed to solve pressing economic and political problems in a consistent and ideol­ ogically sound manner. The fundamental political problem was how to achieve unity and order in a fecTerai systemcomposed of divergent anTrnriJ.iiFffTpnnflipting rppnn£flndjntprpfit groups w h ilp jic if ln T f a jn in g the~dominance of UiuXC\TTKe~fundamental economic problem was how to achieve greater macroeconomic control and more efficient microeconomic decisions without violating the principles of market socialism and workers’ self-management. The same basic strategy was adopted to deal with both of these problems. In both the and the political structure, decentralized units were required to negotiatojwith one'another fcTreach c ^ sensu^agreements befofe~action could be taken by any individual unit. According to Ellen Comisso, bargaining became the ćeirtr^Tprinciple of economic and political life (1978, p. 4), and consensus decision-making prevailed over majority decision-making. At the apex o f the complicated bargaining arrangements stood the LCY, whose task it was to promote nego­ tiation and help formulate compromise solutions. While appealing in theory, particularly when viewed in terms of the professed goals of self-management, the new system ran into sub­ stantial difficulties in practice for a variety of reasons. Consider, first, the use of social compacts to formulate and implement government economic policy. Because of deep and long-standing conflicts of interest among the republics and provinces, such compacts usually require lengthy periods of negotiation. By the time a compact has been completed, the moment for action may have long since passed, or, in some cases, an altogether different problem requiring precisely the opposite government policy may nave arisen. Thus, for example, action on the 1976-80 plan was delayed for more than a year because of failure to reach agreement on the fifteen social compacts proposed 10

THE NEW INSTITUTIONAL FRAMEWORK: REALITY

for priority sector development.* More recently (1979), the govern­ ment was extremely slow in acting to introduce restrictive macro measures to cool down the economy, although it had been clear for at least six months that such measures were warranted. Repeated delays in the negotiation of social compacts and SMAs to support the needed policies were at least partly responsible for the govern­ ment’s failure to act earlier (Robinson 1979a, p. 22). Similarly, conflicts of interest among republics and provinces delayed recent attempts to develop a long-range plan to reduce oil dependence (Economist, 8/11/79, p. 44). The general point suggested by these examples is clear: consensus policy formation and implementation is feasible only when there is an underlying consensus. In the ab­ sence of such a consensus, social compacts take so long to complete that there can be no effective, timely policy response. A second problem with the system of setting economic policy through social compacts is that they allow for a great deal of dis­ cretion by individual republics, provinces, and communes, frequently resulting in a lack of coordination. Many social compacts are formal and general, expressing only broad commitment to goals without specifying policies for their realization. For example, asocial compact on personal incomes may call for enterprises to link their pay rates more closely to economic performance, but may fail to dictate specific measures to achieve this objective. Or a social compact on taxation of enterprise income may leave the choice o f methods and rates of taxation to individual republics and provinces, with wide­ spread interregional differences as a result (Comisso 1978, p. 19). The formal and general nature of many social compacts does not rule out the possibility of ad hoc administrative intervention by local government and party authorities, which has been a continuing characteristic of Yugoslav economic life and has led to what Eko­ nomska Politika, as early as 1971, called an “ institutionalized politi­ cization of the economy” (3/22/71, cited in Sire [1979a] )._In a rseent speech. Tito himself attacked republican, provincial, and local economic and political authorities fot using their influence to create small prntprfpH ny»rlrnt^ I riiVifly fliu uyHjmq-Qf bUuial UUlllpUCtS lias not eliminated (and indeed mav have exacerbated) local intervention in economic life--the type of intervention that was perceived as in *By the middle of 1977, agreement had been reached on only three of the fifteen proposed compacts. ^Tito made this criticism in his address to the opening session of the Xlth Party Congress of the LCY in June 1978. His remarks were largely devoted to the economic situation (cited in Antic 1978).

11

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

large part responsible for the failures of the market system between “ 1965 and 1972. ‘ SMAs, like social compacts, have encountered difficulties in practice that have limited their utility for coordinating and controlling economic activity. In theory, such agreements are to serve as an intermediate coordination mechanism for enterprise activity, some­ where on the continuum between the market mechanism and central planning. Inter-enterprise communication is to take place not through the intermediation of planning agencies or solely through price and quantity signals on individual markets, but rather through a combina­ tion of market transactions and direct negotiations of interested participants, especially within the forums o f the relevant Associations and Economic Chambers. Direct negotiation is seen as especially im­ portant for two purposes: first, for the development o f enterprise strategies to support policy objectives expressed in social compacts, and second, for the channeling o f investment resources to their most profitable uses. Unfortunately, for a variety of reasons, the negotia­ tion of SMAs has not been entirely successful for either of these purposes. Consider first the role of enterprise negotiation in the area of investment decision-making. Here, at least, economic theory provides a rationale. In the absence of information about future prices and costs, the market mechanism alone does not guarantee optimal de­ cisionmaking, because the individual enterprise does not have access to the data required to make the most profitable decision. Without such information, individual investment decisions are not necessarily coordinated and can produce unwanted aggregate effects, such as the duplication of facilities and excess capacity, on the one hand, or bottlenecks in certain sectors, on the other. Such effects can be avoided if enterprises exchange information about their investment plans prior to undertaking them. Indeed, the exchange o f such infor­ mation is one of the theoretical justifications for indicative planning techniques, which are intended to improve investment decisions by reducing uncertainties about the future behavior o f market parti­ cipants, including the government. Seen in this light, the exchange of information about investment plans by individual firms within the Associations and Chambers can be viewed as a kind o f indicative planning that is itself part of the new planning process. The negotiation of SMAs for investment purposes, however, is designed to go beyond this purely indicative role to solve some of the problems o f capital mobility and allocation that have continued to plague the Yugoslav economy even after the 1965 economic 12

THE NEW INSTITUTIONAL FRAMEWORK: REALITY

reforms. One of the purposes of this reform was the “ de-6tatization” of investment decisions to be realized by the transfer of investable funds from state organizations to banks and enterprises. With the state largely out of the investment picture (government funds fi­ nanced less than one-fifth of fixed capital investment between 1965 and 1970), it was hoped that investment resources would be guided to their most profitable uses by the self-interested activity of their bank and enterprise users. Expectations on this score were not ful­ filled, however. It is impossible to obtain quantitative measures of capital misallocation, but the presumption is strong that capital distribution remained suboptimal for a number of reasons.* In­ terregional optimality was hindered by barriers to capital mobility which encouraged banks, enterprises, and republican and communal governments to keep capital resources within local boundaries. Among the effects of these barriers were the emergence of “ political” factories and the duplication of investment efforts among republics. Intersectoral allocations o f capital were also influenced by market distortions caused by artificially low interest rates and price controls. Finally, inter-enterprise allocations which were affected by both the inter-enterprise and intersectoral distribution processes were also influenced by the credit rationing rules of the banking system. With banks accounting for approximately 48 percent of total domestic financing for fixed investment over the 1969-72 period, these ration­ ing rules had a great impact on the allocation of funds. Two of the major reasons for the institutional reforms of the 1970s were dissatisfaction with the capital allocation process and concern over “ excessive” bank influence in enterprise investment decisions.t SMAs, encouraging direct contractual arrangements among enterprises for the “ pooling” of resources on investment pro­ jects, were intended to deal with these concerns. Such agreements, which allow for contractual business deals ranging from complete mergers to temporary cooperation on specific investment projects, *For detailed discussion of problems in the capital allocation process in Yugoslavia, see Tyson (1977c) and Section III below. ^Given the cooperative nature of Yugoslav banks during the 1965-72 period, an outside observer might conclude that the Yugoslav banking system was weakened by “excessive** borrower or enterprise control over bank lending Policies, but the dominant view throughout Yugoslavia was the opposite— namely, that banks had too much influence on and independence from the enterprises they served. Bank influence over enterprise investment decisionmaking was viewed as contrary to the principle of self-management at the enterprise level. 13

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

encourage the distribution of investable resources between surplus and deficit enterprises without the mediation of banking institutions. In theory, these special forms of contractual cooperation among enterprises can provide a mechanism for stimulating capital mobility in a system where alternative mechanisms—such as direct, private equity or bond ownership, on the one hand, and state ownership and planned allocation of capital, on the other—are ruled out by ideol­ ogical and political conditions. Bank allocation o f investable resources as a mechanism for the distribution of capital had become icteolugicaUyTarnl [julltfcallv suspect bV tlurear'T 1ff7Arri-it-was deemetfto be inconsistent with the exercise of enterprise self-managementnghts in investment decision-making.* Direct"contraCtUaTagreements among enterprises seemea to provide a means for exercising these rights while at the same time moving capital from enterprise to enterprise. Such agreements were to allow for the “ pooling o f resources” or the joint self-financing of investments by a number o f enterprises who would independently work out consensual decisions about the terms of their association. To guarantee that these pooling agree­ ments remained consistent with the Yugoslav concept of social property, and did not devolve into a system of private ownership among firms, only two kinds o f association other than merger or consolidation were permitted: (1) a kind o f joint venture association allpwing for limited and temporary (though renewable) profit-sharing among enterprise participants or (2) a conventional credit relation­ ship. In the first kind o f association, enterprises (or BOALs) make resources available to other enterprises (or BOALs), in return for which they receive either the right of sharing in the income thus created (and the risk) or some other commitment, like a commitment for future deliveries of specific commodities. The right to incomesharing has to be limited either by the amount of the contributed re­ sources plus some negotiated compensation or by the period over which income is to be shared. In the credit form of association, enter­ prises (or BOALs) lend resources to other enterprise (or BOAL) users at fixed contractual repayment terms with or without additional com­ pensation in the form of interest. Neither kind o f association permits equity-type financial arrangements that allow some enterprises (or BOALs) to establish permanent control over other enterprises (or BOALs) or permanent claims to shares of their incomes. *Bank discretionary influence over access to investment funds was thought to be inconsistent with self-management because decisions over the use of surplus product rested with autonomous bank management rather than with those who actually produced it—i.e., the workers of self-managed firms.

14

THE NEW INSTITUTIONAL FRAMEWORK: R E A L IT Y

Although SMAs of the types discussed here can enhance capital mobility in a self-managed economy, they cannot resolve all of the problems of capital allocation in such a system. From an wnnnrnv. wide point o f view, ontimalitv r»f capital use requires that all invest­ ment proiectg-k^ rvaTnnTcd uslng'the same measure o f aggregate cap i­ tal scareitv^Fh ere is n nlvpne way to ensure this outcome in a selfmanaged system: pfr>pin+o mrt^rpal financing o f enterprise inves t­ ment by e ithcr a^ccntral. state-run capital fm 'j^ a p r” n*° marketthat charges its enterprise borrowers an interest rate that just equals tne marginal productivity o f capital in the aggregate.* riparlv thp Yngodave ham rfo^iHod against botti o f these alterna ­ tive forms of external financing in favor of internal financing eitne r bv individual firms or by groups of firms in a self-management association. Internal or self-financing, however, in no way guarantees that the return^to capital will be equalized across investment pro iects. since ln d iv iHnai invocfnrc m a y pmplny widely differing profitability and return standards in deciding on potential investment p ro­ jects. II might be argued that QVet time enterprises will seek out th e most profitable uses for their investable resources, and this w ill promote an efficient use of capital resources in the long run. But this is not necessarily the case, since the imputed cost o f capital in each firm depends not on any external indication of capital scarcity, b u t on an internal evaluation of the tradeoff between income earned and distributed today and income earned at some future point in time as a result o f current savings. Since such evaluations are likely to vary among firms depending on the characteristics o f their decision­ makers, it is possible that some firms will undertake investment projects only at very high rates o f return, while others will undertake projects at much lower rates. Jnter-entemrise differences in imputed capital returns will in turn be reflected in inter-enterprise differences m incomes paid to workers—the imputed return to labor. As Vanek and Jovicic (1975) have demonstrated, this has apparently been th e case in Yugoslavia, where the absence o f market-clearing charges f o r capital has artificially inflated the incomes paid out to workers in capital-intensive sectors. Joint or associated “ self-financing” rather than self-financing by individual firms should reduce inter-enterprise differences in capital returns and worker incomes by increasing th e mobility of capital across enterprises, but there is nothing in the n ew system to guarantee that these differences will be eliminated in th e long run. Mor does the new system solve the problems o f capital *See Vanek (1975) for the theoretical justification of this assertion. 15

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

-allocation inherent in the rules o f collective ownership on which_the Yugoslav-system rests. As is well known, the Yugoslav authorities have abandoned a system of state ownership in which the state, as representative of society, disposes of the returns to capital, and have replaced it with asytem of limited OF g++Qr,ligWI ™11fTtiYf>nr cr™T -^ownership, in which enterprise members can freely dispose of the returns to the capital stock they work with and help create by selffinancing only as long as they remain members of the enterprise. By now, the sh o rtc o m ings o f gnrh collpc(;jYP ™»rnorghip w a w a l l nnH or. stood. Since workers share in the returns on enterprise investment qnJy"as'long aTthey remain with the enterprise, there is a substantial dlimgentm; I'Ot mtlividual workirs to invest, in their firm7~espeeially V iT ^ - thflV ai,° r la" " ’"n 1o3Ye m the npnr ft’ j’ T f At n re°"Tt"ulTthe liinitatinn /->n Aha pvnpPlty "phL* of iiidiviflunl Yrnrlinrr in collective q ^en terprisp c a p ita l, a higher return on f ntiP T-*0” is required \rv> j to^ make workers inHiffap”1* hatwpen such investment and invest­ e d meBtiii piivalely Gwnedassets/The Hjffoi-ontiai tho rf>qrmv.H return oh private" assets and* the rpqiiired return on collective assets indicates a misaliocation of investment resources between privafg and cpllectiye__uie~s. with a relative r'undmliiVTpgfrnpnt” jp qq]lectiyejssete. «Beearrae~-workprs prefer privately owned assets to those that are collectively owned, they are likely to distribute the bulk of enterprise incomeT in personal income payments instead oi retaining it~to 'finance collggtive-entorprioc-fflvestment. Thus the rates of enterprise savings and self-financed investment are likely to be low, and collec­ tive investment is likely to be financed primarily through external sources when available. These tendencies are likely to be enhanced by the low interest rates on external credits inYugoslavia. Nominal interest rates on bank credits have been below estimated rates of return on enterprise investment and prevailing inflation rates.* Under these conditions, theory predicts low enterprise savings rates and persistent enterprise competition for scarce external credit. Certainly there is competition for credit in Yugoslavia, and there appear to be low savings rates in a number of enterprises and sectors during periods in which the enterprises exercise control over the distribution of their income between personal incomes and savings (Tyson 1977b). On the other hand, contrary to theoretical expectation, savings rates are quite high in many firms and sectors (see Section III. 2 below). *See Tyson (1977b) for a more complete discussion of the relationships between interest charges on external capital and self-financing in the Yugoslav economy.

16

THE NEW INSTITUTIONAL FRAMEWORK: REALITY

The point to be emphasized here is that ihe newly proposed methods of cooperative or pooled self-financing do notTsolve the i *ipilrnn11nrntion iimt “ muli limiuilmpnt” problems caused by selfTmancing on+pi-pi-icn in a system of attenuated collective ownership rights. The only way these problems can be solved rj »lyJiTtFoFnifiinff a gygtSrTnf ov+ornal financing based on tne princf^Ies~ofprivate or state ownership. Unfortunately, for political and_ ideological reasons, such a system has been an impossihflity in Yugo­ slavia, and the new system o f cooperative SMAs, if anything, tends to aggravate the problems associated with self-financing by encouraging self-financing arrangements at the expense of external, bank-finan­ cing ones. The pooling of investment resources through SMAs provides a mechanism for the negotiation and financing o f group investment projects that are remunerative from the perspective of group partici­ pants. Whether such projects are also remunerative or desirable from a broader social perspective depends on a number of factors, includ­ ing (as noted above) whether the imputed cost o f capital used in pro­ ject calculations is reflective of aggregate capital scarcity, and whether projects are consistent with the developmental priorities agreed upon in the social plan. In theory, of course, the consistency of group and social priorities is guaranteed by the fact that the social plan is con­ sensual and that SMAs for group projects merely specify the details for group action in accordance with the underlying social consensus. In practice, however, the social plan cannot possibly serve the interests of all enterprises, groups of enterprises, or sectors to the same degree, and thus actions that are deemed socially desirable may not be undertaken unless the government provides additional incen­ tives. In short, the apparent consensus o f the social plan can become a reality only if policy is used to motivate or force enterprise parti­ cipants to take socially desirable actions. Several examples from the 1976-80 plan period will illustrate this point. In recent years, discussions of various forms o f cooperation among enterprises have focused on the need for the pooling of invest­ ment resources along vertical lines—in particular, between foreign and domestic trade organizations and productive enterprises and between manufacturing enterprises and producers of raw materials. This emphasis reflects a perceived need to channel investment funds to basic and materials industries in line with the priority develop­ ment strategy of the 1976-80 plan (see Section III below). To date, however, SMAs have tended to develop along horizontal rather than vertical lines, and there is some concern that this tendency will lead 17

THE Y UG O SLAV ECONOMIC SYSTEM IN THE 1970S

to the monopolization of certain markets along product and terri­ torial lines.* An agreement among household appliance producers in Serbia for “ specialization in production and harmonization o f development” is a case in point.t This agreement attempts to elim-; " inate factors causing unprofitability among group members—in­ cluding low-capacity utilization, small production runs resulting from broad output assortment, and duplication of production facilities— by specifying the quantities and assortment of goods to be produced and marketed by each firm. The spirit of the agreement is akin to the spirit of “ organized free trade” (a concept recently espoused by the French), and the implications of such a market-sharing and develop­ ment program for oligopolistic market behavior are obvious. It is ironic that these producers failed to reach an agreement on their own in 1974 or 1975, and only under strong government and party pres­ sure was an agreement finally achieved in 1976. A similar situation arose in connection with an SMA recently concluded among certain manufacturers of metal products in Belgrade. According to press reports, the agreement was achieved only under the “ organized activ­ ity and initiative” of the LCY and other sociopolitical communities (Ekonomska Politika, 2/14/77, p. 14). In both of these cases, exter­ nal pressure from government and party authorities appears to have been the essential ingredient in the formation of what are allegedly “ consensual” SMAs.** Apparently these authorities have also fre­ quently been instrumental in SMAs leading to the merger or consoli­ dation o f unprofitable enterprises with profitable ones. Pressure is brought to bear on stronger firms to merge with weaker ones, there­ by averting the politically dangerous and ideologically difficult option o f bankruptcy .tt *Ekonomska Politika contains two articles critical of monopolistic ten­ dencies in recent SMAs (1/31/77, pp. 6 and 11). tFor a detailed discussion of the Serbian agreement and its background, see Ekonomska Politika, 5/14/77 (p. 19) and 12/13/76 (p. 14). * * Apparently there has been considerable enterprise resentment of govern­ ment pressures to establish pooling or cooperative arrangements. Perhaps this resentment and the underlying unwillingness of enterprises to cooperate in cer­ tain market circumstances will limit the impact of “voluntary” agreements on market behavior. (For a discussion of enterprise resentment of government pressures, see Ekonomska Politika, 5/30/77, pp. 23-24). ttGranick (1975, pp. 428-29) cites several examples of the consolidation of weaker and stronger firms at the party’s or government’s request. Wiles (1977, p. 349) also gives some examples. Wiles argues that CO 05 iH to CO t> CO Vi y 05 -Q i—1 0 E 0 TJ 0 8 y rH 0 Q I> 05 "cd rH y 00** *2 T3 d 0 £ iH T3 #0 O 2 y e .s y ed no N y 0 y

.0

) -g §00 2I S2 co

CO

T373

to

3a

« 3 c
ffJa" " ‘,,',nii1Tnr» fa .the 1970s to suggest that the j r H« » c capital misqllocation that nave plagued the Yiigosi avpcon nmv since the 1950s have been solved^A lth ough~ffip^Yngoslav authorities ■have iecottriiig6dJ'0iese nrohlemsr for both political and ideological reasons the structural reKm£^iey_Jiave_irdiaduced==such_as—the—new-systeni_Qf_§cicial planning and the various mechanisms for the pooling o f resources W on g enterprises—have not solved them and may indeed have aggravated them-What is needed in the Yugoslav self-mnnagpmpnt. system is a set of rules that guarantees that alternative uses o f capital -will be judged according to a consistent measure of capital scarc-itv y A private ownership system with capital allocation through financial \ markets in which privately owned firms, individuals, and banks par­ ticipate would achieve this objective. So would a system of “ socialist” ownership in which the state charges firms for their use o f capital and allocates the returns to capital among competing uses. The inter- / mediate system chosen by the Yugoslavs—collective ownership and I the self-financing of investment under the guidance o f state planning—/ cannot achieve efficient capital utilization to the same degree as either of these other two systems, but it may be all that is feasible under current political and ideological conditions. /

51

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S 5. GROWTH AN D EFFICIENCY IN RESOURCE USE: LABOR

One of the persistent problems plaguing the Yugoslav develop­ ment process has been its inability to absorb the available labor sup­ ply. This problem first became particularly acute during the post­ reform plan period of 1966-70, when social sector employment in­ creased by only .7 percent a year, partly because of the emphasis on efficiency that accompanied the reform and partly because o f the recession that followed its introduction. In an unfortunate combina­ tion of circumstances, the low growth rate o f domestic employment opportunities coincided with an unusually large increase in the labor force—an effect o f the postwar baby boom. The imbalance between labor supply and demand, resulting in a dramatic increase in the number of jobseekers, was undoubtedly one o f the key factors behind the huge migration of Yugoslav workers to jobs in Western Europe. During the 1970s the growth rate o f domestic jobs has increased considerably over what it was during the 1966-70 period, and has returned to its pre-reform level. Employment in the social sector of the economy has increased quite steadily at an average rate of about 4.3 percent between 1971 and 1978. Rapid growth in domestic em­ ployment opportunities has been particularly critical because o f the large net return of migrant workers occasioned by recessionary con­ ditions in Western Europe after 1973-74. During the 1965-73 period, external migration absorbed about 60 percent o f the total increase in the Yugoslav labor supply (IBRD 1979, p. 252); the number o f workers temporarily employed abroad climbed sharply from an esti­ mated 275,000 in 1966 to more than one million by 1973. After 1973 the net outflow of labor became a net inflow o f 60,000 work­ ers in 1974, 50,000 in 1975, and 55,000 in 1976 (Kosinski 1978). 'A continued annual inflow of about 40,000-50,000 workers is pro­ jected through the end o f the 1970s (Ekonomska Politika, 5/9/77, p. 18; 1976-80 plan projections). The magnitude of the employment problem facing the Yugo­ slavs in coming years is suggested by the fact that, despite rapid em­ ployment growth in the 1970s, the number of jobseekers has more than doubled from 290,000 in 1971 to an estimated 738,000 in 1978. Measured as a percentage of the estimated domestic industrial and agricultural workforce, these figures imply an increase in the domestic unemployment rate from 3.7 percent in 1971 to 9.2 percent in 1978. Measured as a percentage of the sum o f social sector em­ ployment plus registered unemployment, these figures imply an 52

ECONOMIC PERFORMANCE AN D DEVELOPMENT IN THE 1970S

increase in the unemployment rate from 6.8 percent in 1971 to 12.3 percent in 1978. In addition, an estimated 20-30 percent of the active population in the agricultural sector (400,000-600,000 workers) is unemployed or underemployed, and this situation has probably been aggravated in recent years by the fact that nearly two thirds of the returning migrants have gone back to this sector (Kosinski 1978). The significance of the private agricultural sector in the Yugoslav unemployment problem is shown in the fact that during the 1970s the number of workers leaving this sector for jobs elsewhere has been twice as large as the natural increase in the labor force. Underemployed workers in agriculture seeking employment in the social sector frequently register as jobseekers. Because the num­ ber of jobseekers includes both workers who are without jobs al­ together and workers who wish to change jobs, it overestimates the magnitude of the unemployment problem in the short run. Even when this overestimation is allowed for, the problem remains severe. This is indicated both by sharp increases in the number of jobseekers and by changes in their structural characteristics. For example, the share of jobseekers under 24 years o f age was 54 percent in 1976 compared to only 42 percent in 1965, and the share of jobseekers looking for employment for the first time (a better measure of workers who are unemployed than total jobseekers) rose from 33 percent in 1965 to 60 percent in 1976. By the mid-1970s, young, educated, and never-before-employed workers constituted the largest single category of jobseekers. Surprisingly, for a country with a severe unemployment prob­ lem, Yugoslavia until quite recently did not have a coherent compen­ sation program for unemployed workers. Registered jobseekers did have the right to register for important social benefits, such as medical-disability and pension benefits, however, which tended to inflate the number of jobseekers. According to the OECD, approxi­ mately 400,000 workers—more than one-half the total number of jobseekers—were registered to get these social benefits in the mid1970s (OECD 1978). One reason why Yugoslavia did not have an unemployment compensation scheme was that many registered jobseekers had access to support from the private agricultural sector or had other jobs; as a consequence, only an estimated 3 percent of them would have been eligible for unemployment benefits. As the structural characteristics of the unemployed group changed, however, the need for a comprehensive compensation scheme became evident, and a new program was introduced in 1978. It expanded the coverage 53

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

of benefits, made them independent of the individual’s property holdings or family size, and reduced variations in coverage across republics (OECD 1978). In addition to introducing comprehensive unemployment compensation, the Yugoslavs have devised a series o f new measures and policy initiatives to create additional jobs in the social sector and to encourage the growth of additional jobs in the private nonagricultural sector. A new system of social compacts and SMAs calls for annual agreements on employment targets in the social sector, and there is some evidence that these agreements have been used as mechanisms to encourage firms to hire additional workers. This seems to have been particularly important in 1975-76, when rapid increases in social sector employment occurred despite stagnation in social sector output. Another policy initiative focuses on ways to stimulate private nonagricultural employment. By the mid-1970s, about 4 percent of the total labor force was employed in the private nonagricultural sector—mostly in small, one-two person, owneroperator establishments, predominantly in services, handicrafts, and construction. During the 1972-78 period, employment in this sector grew at about 2.5 percent a year—a rate which, although reasonably high, was considerably below the rate of 4.5 percent achieved in the 1960-72 period (OECD 1979, pp. 15-16). Despite continued growth, however, the private nonagricultural sector has remained a limited source for new jobs for a variety o f reasons, including the lack of fringe benefits and job security for workers and difficulties within the sector in gaining access to credit and foreign exchange. Policy measures have tended to discriminate against the private sector, particularly in the area of taxation, and this, combined with the fact that private sector jobs have generally had lower incomes and less job security than social sector jobs, has discouraged the expansion o f private sector activities. Recently, however, a more encouraging attitude toward private sector employment has been evident in Yugoslav economic policy. Tito has spoken of the need to “ continually seek new openings for employment, including openings in the sector o f the self-employed,” and has condemned “ sectarian views” that private work is a constant danger to socialism (Tito 1979). New policy measures adopted in social compacts on the development of the private sector are de­ signed to meet this need by providing better access to housing, foreign exchange, and credit and a reduced tax burden. So far there is little evidence that such measures have been effective, but clearly their thrust is in the right direction. Unfortunately, a limit o f five salaried workers per private establishment has been maintained. This, 54

ECONOMIC PERFORMANCE AN D DEVELOPMENT IN THE 1970S

combined with the high costs of labor due to the heavy imposition of taxes and other charges on wages, whether paid in the private or social sector, will continue to restrict the number and kinds o f jobs the private sector can provide. A new institutional form for cooperative activity among private individuals—called a Contractual Organization o f Associated Labor (CNOAL), and introduced in the Constitution and Law on Associated Labor—has also been developed to encourage the growth of private sector activities. Any private individual, with the approval of the communal government, the local Economic Chamber, and the trade union, can alone or in partnership with others organize a CNOAL, provided he/they have the needed capital. Decision-making within the enterprise will be shared among the partners according to their shares o f the enterprise capital, as will the profits or losses of the operation. A t the end of each year, enterprise capital is distributed among the founders, who can then reinvest or withdraw their con­ tributions. The CNOAL system also allows for cooperative arrange­ ments among private individuals and social sector firms, but where the share of private capital is less than 10 percent, the enterprise is treated as a BOAL rather than as a CNOAL. In these cases, the pri­ vate owners are accorded special managerial status for a specified period of time, and their capital is still repaid to them at end-ofyear intervals. In contrast to the maximum o f five workers for other types o f private establishments, the law sets no limits on the number of workers a CNOAL can employ. There is, however, a limit of ten owners per CNOAL because each owner must contribute at least 10 percent o f the total capital. Finally, the guidelines for CNOAL operations must be set down in an SMA among owners and workers that specifies rules for income sharing, equity reimbursement, and the rights of owners and workers in day-to-day operations. A t this early date, it is impossible to evaluate the significance of the CNOAL as an institutional form for encouraging private sector activities in an ideologically acceptable way. Not surprisingly, the only experience with CNOALs has been in Slovenia, where because per capita incomes and personal savings are high, private individuals have the capital resources required to initiate them. As o f 1977 the IBRD (1979, p. 274) reported that Slovenia had twenty-thirty CNOALs, each employing between six and ninety workers. Despite their limited practical significance to date, CNOALs offer important opportunities for job development and private sector activities in the future, particularly if private individuals gain access to bank loans to co-finance their establishment. 55

THE Y UG O SLAV ECONOMIC SYSTEM IN THE 1970S

From an ideological and theoretical point of view, the CNOAL is an interesting but problematical institutional form. It is a kind o f private partnership—in the words of James Meade (1972), an “ in­ egalitarian cooperative” —based on private equity ownership, in which private individuals pool their capital resources and share in the decision-making, risks, and profits of their jointly financed acti­ vity. The law restricts the freedom o f action of the partnership in some ways—most importantly, by setting a maximum limit on the number of owners (though not on the size of their capital contribu­ tions) and by requiring an annual renegotiation of the partnership agreement and an SMA between owners and workers on the rights and responsibilities of each. In addition, since the establishment o f a CNOAL requires prior approval by local state, business, and trade union representatives, the CNOALs will probably be prohibited from entering activities that are directly competitive with social sector enterprises. Despite these restrictions, the CNOAL option is note­ worthy because it introduces the possibility of private cooperatives in the social sector, and because it provides for a form in which workers are treated as workers in the sense of privately owned enterprises and not as enterprise decision-makers in the sense o f self­ management. Both because it is based on private ownership and be­ cause it hires workers by contractual arrangements, the CNOAL is at odds with the ideological principles of social ownership and self­ management on which the Yugoslav system is based. Apparently the Yugoslav authorities have been willing to overlook the ideological inconsistency of CNOALs because of their potential practical bene­ fits in the mobilization of private savings for productive uses and job creation. For example, CNOALs may provide a means of directing remittances and the savings of returning migrant workers from per­ sonal expenditures on durables and housing to productive uses. Another ideologically questionable policy proposed to help mobilize private savings is to allow private individuals to buy bonds denominated in foreign exchange from social sector enterprises which in some cases carry with them a right to social sector employ­ ment (IBRD 1979, p. 276). This option would enable private indi­ viduals to use their private capital to lend to social sector enterprises and thereby purchase a job. So far this option has been officially frowned upon, but in a recent discussion in Vojvodina it was suggest­ ed that enterprises should be allowed to borrow from private indi­ viduals who would earn either interest on their money or jobs for themselves or family members in return (Borba, 5/10/78, p. 2; reported in ABSEES, September 1978). Also being discussed is the 56

ECONOMIC PERFORMANCE AND DEVELOPMENT IN THE 1970S

possibility o f raising the limitation on the size o f privately owned farms from ten hectares to twenty plus up to seventy more o f pas­ ture land and rocky ground (Stankovic 1979). This measure also en­ hances the role of private ownership in the system, and is being pro­ posed both for its potential for mobilizing private savings for pro­ ductive uses and for providing more employment opportunities in the private sector. (It should be noted, however, that under this legislation the number of workers hired by a private farmer would continue to be limited to a maximum of five.) Despite new policy initiatives to increase employment oppor­ tunities in Yugoslavia, there is little prospect that the unemployment and underemployment problem will be resolved by 1985—the end of the next five-year plan period. Rather the IBRD predicts that with a return of 250,000 migrant workers over the 1975-85 period, com­ bined with the projected natural increase in the labor force, the num­ ber of unemployed workers will decline by only about 140,000, and as a consequence there will be little opportunity for the continued outflow of labor from agriculture in the LDRs, especially Kosovo and Bosnia-Hercegovina (IBRD 1979, p. 279). This will pose a signi­ ficant barrier to Yugoslavia’s efforts to redress regional income inequalities, since these are largely the consequence of substantial differentials between industrial and agricultural incomes (see Section IV) and the fact that the share o f private agriculture in total employ­ ment is much higher in the LDRs than in the MDRs (69 percent in Kosovo compared to only 33 percent in Slovenia in 1971, the last census year). Yugoslavia’s poor performance in absorbing its available labor supply in the development process has been a source of skepticism about the effectiveness of self-management in this process. To scholars in both the West and the East, Yugoslavia’s experience sug­ gests that self-management may not be an effective institution for development because there is nothing in the behavioral rules of the self-managed firm operating in a market system to guarantee full employment. Indeed the theoretical literature suggests that in cases in which workers employed in self-managed firms earn shares in net income which include shares in the returns properly imputed to capital, the aggregate demand for labor by these firms will fall short of the available labor supply. As the preceding analysis in this section indicates, this is the situation in Yugoslavia, where the cost of capital is artificially low, and employed workers are allowed to pay them­ selves incomes that include returns to capital. As a consequence, workers who have social sector jobs have incomes that greatly exceed 57

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

those earned in other sectors. For example, the IBRD estimates that between 1966 and 1974 the incomes of those employed in private agriculture averaged only 57 to 68 percent of the incomes earned by unskilled workers in the social sector. The inflation o f labor returns in industry has made labor a more expensive input than its scarcity value (as roughly measured by labor incomes in agriculture)* requires, and has tended to bias enterprises in the direction of capital-intensive production techniques with more limited job creation possibilities than might otherwise have been necessary. Of course, in the self­ managed market system, the existence of unemployed workers in agriculture who can be hired at less than the incomes paid to em­ ployed workers in industry has no effect on the individual self­ managed firm, which has no incentive to look for the cheapest labor available. In a system based on private ownership, on the other hand, the profit-maximizing behavior of private owners leads diem to seek the cheapest available labor, thereby in theory guaranteeing full em­ ployment and the equalization of wages for labor of similar produc­ tivity. In die self-managed system, there is no inherent tendency toward the objectives o f full employment and income equalization, even when firms are forced to pay a full scarcity price for capital. These objectives can be achieved only if capital resources are made available to existing firms or to unemployed workers to expand production facilities and to create new jobs. In a word, free entry of new firms is required to realize both aggregate full employment and the equalization o f labor productivity among enterprises. Moreover, when existing firms are not required to pay a scarcity price for capital and are allowed to distribute capital returns to work­ ers, as they are in Yugoslavia, there is nothing in the system to guar­ antee full employment even when capital is mobile. Thus, according to this analysis, Yugoslav policy has tended to aggravate rather than to offset the natural barriers to the rapid realization of full employ­ ment in the self-management system. Significantly, the Yugoslavs have not provided a mechanism whereby the returns to socially owned capital in self-managed firms can be siphoned off into jobcreating investment projects. Some of these returns go into the personal incomes o f the employed workers, and some are used to finance enterprise investment projects which may or may not be con­ sistent with the realization of aggregate employment targets. Seen in this light, the new attempts by the Yugoslavs to funnel private * Labor incomes in agriculture probably underestimate the scarcity value of labor in Yugoslavia because they are deflated to the extent that barriers to job entry in the social sector keep them artificially low. 58

ECONOMIC PERFORMANCE AN D DEVELOPMENT IN THE 1970S

capital into job-creating investment projects and the new provisions to encourage banks to co-finance some of these projects can be understood as means to enhance capital mobility to groups of work­ ers not currently employed in the social sector. Similarly, the new activist and interventionist attempts by state and party officials to set employment targets for firms in the social sector can be under­ stood as an indirect mechanism for getting firms to act in ways con­ sistent with aggregate labor scarcity and availability. Preferable to these indirect measures, however, would be the introduction of a system in which workers employed in existing firms were forced to use real scarcity values of labor and capital in their employment, income, and investment decisions. Under these circumstances, pro­ vided unemployed workers had access to loanable funds, the self­ managed market system would tend toward full employment in the same way as the private ownership market system. The Yugoslavs have not only neglected to provide for the capital mobility essential to full employment in the self-managed system, but they have also artificially inflated the costs of labor through the taxation system, thereby aggravating the unemployment problem. Estimates by the International Labour Organization (ILO ) indicate that, by the 1970s, various taxes and charges levied on labor incomes plus increments to incomes from profit-sharing arrangements amounted to 65 percent of total labor costs. Moreover, these addi­ tional labor costs were a higher percentage of total labor costs than anywhere else in Europe (Rasevic, Mulina, and Marcura 1978). Higher labor costs, of course, have aggravated the tendency toward capital intensity which already exists in the system, and although the Yugoslavs have recently tried to ameliorate the situation by add­ ing a tax on enterprise income to existing taxes and charges on labor, labor costs are still artificially inflated by the Yugoslav fiscal system. If the preceding is correct, it suggests that labor absorption problems in Yugoslavia have been partly the consequence of the failure of Yugoslav policy to provide the institutional means and price signals to guarantee full employment in a self-managed market system. The failure is not one of self-management per se. Indeed, anecdotal evidence supports the view that workers in self-managed firms do not restrict employment in order to increase their incomes but, if anything, tend to overemploy rather than underemploy rela­ tive to the requirements of current production and the current capital stock (Comisso 1979). On the other hand, even if policy improvements were introduced along the lines suggested here, a market-oriented development process like the Yugoslav one would 59

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

tend to be less successful than a plan-oriented development process in preventing unemployment, at least in the short run. In other words, one should not expect Yugoslavia to achieve the “ apparent full employment characteristics” achieved by its Eastern neighbors, because there is nothing in the market mechanism to guarantee full employment as central planners can do simply by manipulating wages and employment without regard to enterprise profitability. That the “ full employment” realized in planned systems is often more apparent than real is suggested by the fact that market-oriented reforms, such as those in Hungary and those considered in Czecho­ slovakia, have been accompanied in the short run by the desire of firms to lay o ff “ surplus workers.” A more appropriate way to evaluate Yugoslavia’s employment performance is to compare it with that o f other market economies at similar levels of development. Significantly, when viewed from this vantage point, Yugoslav performance is about what one might expect. For example, the EBRD finds that the employment elasticity o f in­ dustrial social sector output in Yugoslavia has been around .7, which compares favorably with that of other developing market economies. A similar conclusion is derived from the figures in Table 3 on the employment performance of middle-income countries (see p. 34 above). These show that Yugoslavia’s job-creation performance in the industrial sector is comparable to that in other middle-income countries. On the other hand, since Yugoslavia’s gross investment rate has tended to be substantially above those in the other middleincome countries—an average of nearly 30 percent in Yugoslavia in the 1970s compared to averages of around 22 to 25 percent in Greece, Spain, and Turkey (IBRD 1978)—the evidence supports the view that Yugoslavia’s investment efforts have focused on capitalintensive projects, and have thus been less effective in job creation than smaller investment efforts elsewhere. A similar conclusion based on a comparison of existing international evidence on invest­ ment and employment performance in developing countries has been suggested by Vanek (1978), while data provided by the IBRD indi­ cate that the capital-intensive bias in Yugoslav development has pro­ duced an incremental capital-output ratio that is anywhere from 25 to 50 percent higher than the incremental capital-output ratios of the other middle-income countries listed in Table 3 (IBRD 1979, p. 171; 1968-73 average figures). A more complete comparative analysis of Yugoslavia’s employ­ ment performance is needed before a definitive evaluation can be made, but the available evidence seems to support the view that 60

ECONOMIC PERFORMANCE AN D DEVELOPMENT IN THE 1970S

Yugoslavia’s experience has been similar to that of other market economies of similar development levels. This finding suggests that the institutions of self-management and collective ownership may not be the sources of the difficulties in labor absorption as described in the literature. These difficulties may be more the result of carrying out substantial structural changes in employment and production in a market system and choosing a development strategy that favors capital-intensive sectors.

61

IV

REGIONAL DEVELOPMENT PROBLEMS

Disparities in the level of economic development among the six republics and two autonomous provinces (hereafter called regions) in Yugoslavia continue to be a major economic problem. These dis­ parities in some cases have even increased during the postwar period, despite persistent policy efforts and despite rapid growth in the less developed areas. The extent of differences in development levels and growth rates among the regions is indicated by the figures in Table 8. These figures show that differentials in per capita incomes have persisted or even increased over the 1952-78 period, even though during some periods (such as the 1971-75 plan period) growth rates in the LDRs have exceeded those in the MDRs.* Rapid growth in output has been more than offset by rapid growth o f population in the LDRs, preventing any equalization o f regional per capita incomes. It is important to emphasize, however, that even without differences in regional population growth rates, approximately equal rates of growth o f social product in the MDRs and LDRs over most o f the postwar period would not have produced any dramatic reduc­ tions in regional inequality, at least as measured by regional income levels. Differences in the dynamics of population growth across regions have contributed to the severity of a second regional de­ velopment problem—the difficulty of preventing unemployment from exceeding socially and politically tolerable levels and the need to absorb unemployed and underemployed labor from pri­ vate agriculture into social sector jobs. The regional dimension of the unemployment situation is indicated by differences in regional unemployment rates (calculated as the ratio between registered job­ seekers and the sum of jobseekers plus social sector employment). In 1975, for example, regional unemployment rates ranged from a high o f nearly 24 percent in Kosovo to a low o f 2 percent in Slovenia; Between 1970 and 1975 the growth rate of social product in Kosovo was about 37 percent higher than the national average, while in Bosnia-Hercegovina the growth rate was about 6 percent above the national average.

62

REGIONAL DEVELOPMENT PROBLEMS Table 8 REGIONAL DIFFERENCES IN SOCIAL PRODUCT PER CAPITA AN D GROWTH RATES IN POSTWAR PERIOD

Social Product per Capita, 1952-1977a

1952

1960

1970

1977

77 57 59 35

67 78 64 34

67 72 65 30

120

125 193 97

127 196 97

110

121

Less Developed Regions Bosnia-Hercegovina Montenegro Macedonia Kosovo

81 56

66 46

More Developed Regions Croatia Slovenia Serbia Proper Vojvodina

115 203 92

192 95 108

88

Growth Rate of Social Product, 1946-1974

Growth Rate of Per Capita Social Product, 1946-1974

Less Developed Regions

6 . 1%

B osnia-Hercegovina Montenegro Macedonia Kosovo

6.9 6.3

4.4% 4.7 5.2 3.7

6.5 6.9

6.0

6.2

More Developed Regions Croatia Slovenia Serbia Proper Vojvodina

6.2 6.2

5.8 5.1 5.5

Sources: Social product per capita: Statistički Godišnjak (various issues); growth rates: GrliJ?kov (1979). aCurrent prices, Yugoslav avg. = 100. 1977 figures are preliminary.

63

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

the share of total jobseekers in the LDRs was 43 percent while their share of total social sector employment was only 26 percent. Dif­ ferences in the number o f job vacancies among regions have not been balanced by regional differences in numbers o f unemployed workers. In 1977, for example, jobseekers per vacancy in the social sector ranged from lows o f 1.4 in Slovenia and 6.2 in Croatia to highs of 22.3 in Macedonia and 32.5 in Kosovo (Knežević 1977). Unemploy­ ment rates and jobseekers per vacancy have increased sharply through­ out Yugoslavia during the 1970s, but their increase has been more dramatic and their levels higher in the LDRs. In addition, these indicators of labor surplus understate the unemployment problem in the LDRs because they do not take into account the underem­ ployed workers in private agriculture, who make up a large portion of the economically active population in the LDRs. Finally, it is important to note that the outflow of migrant labor during the 1968-74 period did not improve the regional unemployment situa­ tion. The evidence suggests that until quite recently the LDRs were underrepresented in this outflow. According to an ILO study of the Yugoslav labor market, migrant labor by region has not generally followed trends of unemployment by region, and the rate of mi­ gration has tended to be independent of development level as well as of the number of unemployed and underemployed reserves in agri­ culture (Rasevic, Mulina, and Marcura 1978, p. 28). Thus in 1971 the LDRs accounted for only about one-third of total foreign migration, although their share in total labor reserves was much larger. During the 1970s, however, this situation began to change, as larger numbers o f underemployed workers left the LDRs for employment abroad, and the share of the LDRs in total external migration reached 44 percent by 1977-78. The regional character of the labor surplus problem suggests that any policy efforts to eliminate it must focus on methods to create jobs in the less developed areas and to promote the flow of workers from labor-surplus to labor-scarce regions. Both policy approaches are beset with difficulties. Emphasis on job creation in the LDRs—an emphasis that has been only indirectly expressed in regional development programs that have focused directly on inter­ regional shifts of capital—may conflict with the general goal of reducing regional income disparities, at least in the short run. For example, programs to foster the development of private sector jobs or social sector jobs in relatively low-wage, labor-intensive indus­ tries may reduce regional unemployment differentials while leaving regional income differences relatively unchanged. On the other hand, 64

REGIONAL DEVELOPMENT PROBLEMS

policies to alleviate regional unemployment problems by promoting the flow o f labor from surplus to deficit regions are complicated by the need to match the skill composition of the migrants with the skill requirements of available jobs in the developed republics. Ethnic prejudices and suspicions also hinder large-scale interregional popula­ tion flows, and such flows will probably continue to be relatively small and relatively unimportant in the regional development pro­ cess. Available evidence from the 1976-80 plan and recent policy initiatives suggest that the basic principle of regional development strategy in the coming years will be the traditional one of trans­ ferring investment funds from die MDRs to the LDRs. Although the less developed areas have made impressive savings and investment efforts to finance their own growth plans, the volume of investment funds from intraregional sources has not been sufficient to cover the interregional development gap. Thus, in the 1970s the share of in­ vestment in gross output has been about 38 percent in the LDRs compared to about 27 percent in the MDRs. Of the total investment effort in the LDRs, about one quarter has been financed from extraregional sources, although the overall significance o f such sources has varied dramatically among the LDRs, accounting for a full 70 per­ cent of total investment finance in Kosovo, for example. The federal regional development fund is the main channel through which extra-regional finance for investment is provided to the LDRs. A specified percentage of the gross product originating in the socialist enterprise sector is set aside in a compulsory loan system to finance this fund. Resources collected in this manner are in turn dispersed to the LDRs as preferential credits (with lower interest rates and longer repayment periods than would otherwise be available through normal bank channels) to be allocated by the recipient regions according to their own development plans. These investment resources are supplemented by a system o f federal budget grants to provide funds for investment in social infrastructure in the less developed areas. The funds allocated to the LDRs through these two sources represent a significant burden on the MDRs. Recent IBRD figures (1979, ch. 11) suggest that loans through the federal regional development fund alone amount to nearly 3 percent of the gross domestic product of the MDRs and that they reduce invest­ ment in these regions by about 10 percent. The effectiveness of regional development policies focusing on the provision of investment funds at concessionary terms has been hampered by failure to encourage the optimal allocation o f funds 65

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

among competing projects. For a variety of reasons, including the strategy of complementarity in Yugoslav regional development planning, whereby the LDRs have been assigned the role of supplying the MDRs with raw materials and semi-finished products, investment funds have been concentrated in large, capital-intensive projects that have high capital-output and capital-labor ratios. A bias toward capital intensity has also been encouraged by the subsidized rates at which investable resources are made available and by the need to devote a substantial share of investable resources to capital-intensive infrastructural projects. Relatively high personal incomes paid to workers in social sec­ tor jobs and additional labor costs from various taxes and charges have also encouraged capital-intensive projects by making relatively abundant labor a relatively expensive input in the LDRs. Inter­ regional differentials in gross personal incomes paid to workers in the social sector are much smaller than overall interregional differen­ tials in gross income per capita. Gross personal incomes o f workers in the social sector in the LDRs are about 89 percent of the Yugoslav average, while gross income per capita in these regions is only about 63 percent of the Yugoslav average. Workers in the social sector have been able to earn incomes roughly comparable to those earned else­ where in Yugoslavia, despite the fact that their productivity is lower than the Yugoslav average, and despite the fact that there are large reserves o f unemployed or underemployed workers whose earnings and productivity are substantially lower. Several factors have worked to equalize incomes paid in the social sector across regions, including social compacts on enterprise income distribution explicitly designed to achieve this objective, and enterprise efforts to match income levels achieved in other regions by increasing the share of personal incomes and reducing the share of savings in enterprise income. Con­ cessionary charges for capital use also play a role in the determina­ tion of social sector incomes in the LDRs, since firms can distribute some of the returns to capital to their workers as personal incomes. As a consequence, at least some of the investment funds made available for regional development purposes find their way into the take-home pay of workers in the social sector. If enterprises in the LDRs were forced to pay a charge for capital reflecting its true scarcity, and if they were prohibited from distributing the returns to capital as worker incomes, gross income differentials across republics in the social sector would undoubtedly be larger, but intraregional differences between social sector and private sector incomes would be smaller. In addition, with capital charges properly 66

R EGIO NAL DEVELOPMENT PROBLEMS

accounted and with gross social sector incomes appropriately lower in the LDRs, an allotment o f investment funds would finance the creation o f a greater number o f jobs in more labor-intensive activities, thereby narrowing both intraregional and interregional differences in per capita incomes. As a consequence of the bias toward capital-intensive projects in the LDRs that has resulted from the interplay of factors noted here, the sectoral composition o f output in these regions has been rela­ tively biased toward heavy industries such as power generation, coal, and ferrous and non-ferrous metals. These industries are all fairly capital intensive, and all tend to earn lower rates of return on capital than the industrial average. Indeed regional differences in the sectoral composition of capital are a factor behind the lower average efficien­ cy of capital use in the LDRs, although as the discussion in Section III indicates, after correcting for these differences, pure efficiency differentials are still observable. As it turns out, many of the heavy industries that have played a crucial role in the regional development process have been designated as priority industries in the current plan period, and preferred access to credit and foreign exchange for the development of these industries may provide an additional boost to the LDRs. For example, since about 50 percent o f Yugo­ slavia’s coal reserves and 30 percent o f its total power potential lie in Kosovo, preferential treatment of the coal and energy sectors may serve as an important stimulus to development there. It is hoped that the pooling o f resources by manufacturing enterprises for invest­ ment in the development of raw material and energy sources will also serve as a mechanism to stimulate the interregional flow of capital from enterprises in the MDRs to enterprises in the LDRs. So far, interregional flows of capital outside the channels o f the federal investment fund and the budget transfer system have been relatively small. Under the new planning system, however, enterprises using energy and raw material inputs are expected to negotiate SMAs with their suppliers for the joint financing o f investment projects to ex­ pand their capacity, and such agreements could serve to increase capital flows to the LDRs (Hoffman 1979). Interestingly, many o f these joint projects could take the form o f payback agreements whereby the investing enterprises in the MDRs would receive re­ payment and a return on their investment in the form o f preferential access to the raw material and energy inputs produced by projects in the LDRs. Past evidence suggests, however, that the continued inflow of capital, even in increased amounts, to the LDRs will not eliminate 67

THE Y UG O SLAV ECONOMIC SYSTEM IN THE 1970S

regional disparities, at least over any reasonable time horizon. In­ deed, given the tremendous volume of investment in these regions— amounting to investment rates in gross material product o f nearly 50 percent in Montenegro and Kosovo in some years—it is quite likely that there are some absorptive capacity constraints, such as con­ straints on the availability of skilled workers and managerial staff, that impede the utilization of newly created capital to its greatest advantage. Even if there are no such constraints, the inflow of capital will not solve the regional unemployment and underemploy­ ment problems that underlie regional income disparities unless its distribution among competing projects is based on estimates of the opportunity costs o f capital and labor that reflect the relative abun­ dance of labor. Finally, capital inflow does not work as an effective regional development strategy in isolation. Technical assistance trans­ fers and programs to develop skilled labor and managerial talent are also required to provide the complementary inputs essential to the efficient use of capital in the LDRs. Overall, it seems that one of the fundamental lessons learned from the disappointing experience of economic development efforts throughout the world also applies to the Yugoslav regional development problem—i.e., an effective de­ velopment strategy requires policies stressing the utilization of hu­ man resources. Policies that rely mainly on the exploitation of natural resources and/or capital-intensive industrialization will not succeed in reducing income or developmental differences over long periods o f time (Adelman and Morris 1973). In conclusion, it is important to note that although the exis­ tence of regional development gaps poses a problem in many devel­ oping countries, the problem assumes special proportions in Yugo­ slavia both because of the extent o f such gaps and because o f under­ lying nationality conflicts among regions. These conflicts magnify the significance of a resolution to the regional development problem while rendering the formulation of acceptable policies very difficult. Indeed a forceful argument can be made that disagreement over a workable regional development strategy has been a key factor behind major structural change in the Yugoslav economic system. In parti­ cular, the dissatisfaction of the MDRs with the state-directed redis­ tribution of capital resources to the LDRs in the pre-1965 period was one of the main reasons for the dismantling o f state investment funds and the expansion of the market’s role in the investment allocation process in the 1964-65 economic reform. In the early 1970s, on the other hand, dissatisfaction of the LDRs with constant or worsening regional income differences under the market system 68

REGIONAL DEVELOPMENT PROBLEMS

was instrumental in the new emphasis on a more effective planning system, especially in the investment process. It is probably not too for o ff the mark to predict that the course o f regional development will continue to play an important role in the evolution of the Yugo­ slav economic and political system in the future. Certainly all current indications are that the main emphasis in the next developmental plan (1981-85) now in preparation will be the acceleration of devel­ opment in the LDRs.

69

V PROBLEMS IN AGRICULTURAL DEVELOPMENT

Over the 1961-75 period, the share of agricultural production in total social product in Yugoslavia declined from about 28 percent to about 16 percent, and the share of the agricultural labor force in the total economically active population declined from around 60 per­ cent to around 35 percent. Despite these trends, indicating a consid­ erable relative decline in its role in the Yugoslav economy, agricul­ ture remains a critical sector in the Yugoslav development process, and its importance has been reaffirmed in the 1976-80 plan. Yugoslavia’s agricultural sector has two major components: socialized agriculture and private agriculture. In 1975, socialized agri­ culture, which consists of large, agro-industrial enterprises operating on the principles of social ownership and self-management, account­ ed for about 15 percent of the cultivated land area, 5 percent of the active population employed in agriculture, 10 percent of the agricul­ tural livestock, 25 percent of agricultural social product, and 46 per­ cent of marketed deliveries. The remaining land, labor, livestock, and output were found on the small, family-owned-and-operated peasant forms that constitute the private agriculture sector. Besides their differences in size and method of organization, the two sectors are also distinguished by differences in labor productivity (produc­ tivity in the private sector is estimated to be only about one-fourth of that in the social sector) and by differences in market behavior (most social sector output is marketed, while a little more than half o f private sector output is consumed in family households). The social sector is substantially more capital intensive than the private sector, having up to five or six times more capital, which accounts in large part for the productivity differentials between the sectors (Horvat 1976). Finally, the social sector specializes in the produc­ tion of industrial crops and wheat, while the private sector empha­ sizes the production of milk, meat, fruit, and potatoes. Differences between the social and private sectors pervade all aspects o f agricultural life in Yugoslavia. As noted earlier, the esti­ mated gross income per economically active worker in private 70

PROBLEMS IN AG R ICULTUR AL DEVELOPMENT

agriculture has been on the average only about 55 percent of the per­ sonal income per unskilled worker in the social sector in recent years (1970-74). Moreover, despite the rapid decline in the labor force in private agriculture (at a rate of about 5.5 percent a year be­ tween 1970 and 1975), per worker income differences between pri­ vate agriculture and the social sector have remained virtually un­ changed since the early 1960s. The impact of these differences in earnings per worker on differences in household incomes in the pri­ vate agriculture and social sectors has been offset in part by earn­ ings of agricultural households from nonagricultural activities. Ap­ proximately 38 percent of private agricultural households have family members employed outside agriculture, and in recent years the incomes earned from such activities have accounted for nearly 50 percent o f the total incomes of agricultural households (Grličkov 1979). Thus in agricultural households with earnings from nonagri­ cultural activities, incomes are about 70 percent of the incomes earned in worker households. Within agriculture there is a much more rapid increase in output in the social sector than in the private sector. Over the period 195576, the average growth rate of output in the social sector was about 10 percent per annum; the corresponding growth rate for private agriculture was only about 2 percent (Grličkov 1979). Differential growth rates were projected for the 1976-80 plan period as well: social sector output was expected to grow at 8 percent and private sector output at 3.1 percent. However, poor grain harvests due to bad climatic conditions in 1978 and 1979 probably mean that these targets will not be attained. Over the long haul, the growth targets for agriculture can be achieved only by more intensive production techniques and changes in production patterns in the social sector, where the possibilities for obtaining additional land are severely limited, and by improvements in yields and productivity in the private sector, where yields and productivity are now relatively low. A recent evaluation saw private farms as about a decade behind social sector farms with respect to yields (Horvat 1976, p. 95). The yields of social sector farms are characteristic o f yields realized in developed agriculture in the rest of the world, but their labor productivity is significantly lower. Thus there is great unutilized potential in Yugo­ slav agriculture. The private sector will be of particular importance in the coming years because of continued emphasis on livestock breeding to achieve both domestic diet and export goals. The share o f live­ stock breeding in total agricultural production has increased from 71

THE YUG O SLAV ECONOMIC SYSTEM IN THE 1970S

about one third after World War II to about 58 percent in 1976 (Grličkov 1979), and the private sector accounts for most of this in­ crease. Livestock breeding is especially crucial to the realization of planned shifts in the national diet away from cereals toward higher quality foodstuffs, especially meat. Increased output of meat is also expected to provide considerable quantities for export. As recent (1972-73) experience with meat shortages and rising meat prices suggests, there can be conflict between export and domestic diet goals at current levels of meat production. Therefore, increases in livestock breeding at a rate of at least 4 percent per annum must be achieved, and to realize this goal the productivity of livestock breed­ ing in the private sector must be substantially improved. Significant obstacles stand in the way of the realization o f agri­ cultural growth targets in the private sector. Some of these obstacles stem from the important regional dimension of private sector agri­ culture. The bulk of social sector output—about 80 percent in 1974 and 1975—comes from the MDRs, where in general the best quality land is located. In the LDRs, the social sector has had trouble im­ planting itself, and private farms are particularly backward, with a much lower utilization of tractors and fertilizers than in the MDRs. Regional differences in the performance of the private sector are suggested by the fact that incomes per active worker in private agri­ culture in the LDRs are only about 70 percent of what they are in the MDRs. Perhaps more striking is the fact that yields on private sector farms in some o f the MDRs are approximately equal to social sector yields in the LDRs (Horvat 1976, p. 95). Private sector farms in both the LDRs and MDRs are hampered by small size (due in part to legal limitations and in part to rapid population growth), an ad­ verse age structure, a relative paucity o f investment resources and limited access to credit facilities, and the out-migration o f skilled labor. The Yugoslav government hopes to improve these conditions by the extension of cooperative arrangements both among private farmers and between private farmers and social sector farms. Cooperation by contract already exists in a number of activi­ ties, such as equipment use for sowing and harvesting, livestock breeding, and sales arrangements. Renewed emphasis on coopera­ tion of this nature is evident in the “ Green Plan” or social compact on the development of agriculture for the 1976-80 plan period. The compact calls for the greater use of economic measures, such as selec­ tive credit policies, to encourage private farmers to join cooperatives and to encourage the pooling of resources between private and social agriculture. Care has been taken to stress that private farmers must 72

PROBLEMS IN AGR ICULTUR AL DEVELOPMENT

freely decide on the amount and type o f their association with social sector farms and to accord private farms equal legal status with social sector farms. LCY pronouncements on private agriculture have also emphasized that private peasants should cooperate with social sector farms only if they wish to do so. If past history is any guide, only limited cooperation is likely, despite economic incentives. There have been small increases in cooperative sowing and ploughing arrange­ ments and livestock breeding arrangements during the current plan period, but the overall significance of such arrangements in total private sector production has been quite limited. For example, cooperative arrangements involved only about 4 percent of the total cultivated land in private agriculture and about 12 percent o f the total number of cattle livestock in 1977 (Statistički Godišnjak, 1978, Tables 114-45 and 114-48). Cooperation has not gained in popularity because successful private farmers with their own equip­ ment and technology have no real incentive for participation, and because the poorer, more backward peasant farmers, especially in the LDRs, are traditionally suspicious of it. Indeed, some peasants have interpreted recent calls for voluntary cooperation as a danger signal for a return to something similar to early postwar collectiv­ ization attempts (Ekonomska Politika, 2/22/76, p. 17). Another barrier to cooperation is the peasants’ apparent mistrust o f the LCY, as evidenced by the persistent decline in peasant party membership from a high of 43 percent of total membership in 1952 to a low o f about 5 percent in 1975. Recent efforts to recruit new members into the LCY netted about 700,000 new members, but had very limited success among the rural population (Erps and Oldenberg 1979). Party and government officials will have to combat both peasant traditionalism and lack of confidence in the LCY if they are to deal effectively with the problems of agricultural development in the private sector in the coming years. Unfortunately, the representative institutions that have developed during the 1970s, including govern­ ment, enterprise, and quasi-govemmental organizations such as the Economic Chambers, the trade unions, and the new Chambers of Associated Labor at the federal and republican state levels, provide for the articulation of every economically or socially important collective interest in Yugoslavia with the conspicuous exception of the private peasantry (Rusinow 1977, p. 24). Thus recent decentral­ izing political reforms have done little to reduce the peasantry’s distrust of the LCY and its policy outlook on private agriculture.

73

VI MACROECONOMIC PERFORMANCE

Perhaps the most debated aspect of economic performance in Yugoslavia is the inflation that has persisted with varying degrees of intensity since the early 1960s. As the data in Table 9 indicate, inflation in industrial producer prices (wholesale prices), retail prices, and nominal personal incomes has been substantial throughout the 1970s, particularly between 1973 and 1975 and again in 1978 and 1979, with a brief deceleration in 1976. The magnitude of the inflation problem has led government authorities to conclude that “ inflation is enemy number one in our socialist society and the struggle against it is a major political problem” (Nin, 1/1/75 [p. 5]; cited in ABSEES, October 1975). Before discussing the causes of and possible cures for the Yugoslav inflation, it is important to examine it from a comparative perspective. Compared to inflation rates in the developed countries o f the OECD, Yugoslavia’s inflation rate during the 1970s has been quite high, as the data in Table 10 show. The contrast is even greater when Yugoslavia’s inflation is compared to the relative price stability in Eastern Europe, although even there price controls have been unable to contain inflationary pressures (especially in Poland and Hungary). (See Brown and Tardos 1980 and Fallenbuchl 1980.) But perhaps the fairest standard of comparison for Yugoslavia is the other middle-income countries listed in Table 10. Yugoslavia’s in­ flation rate in the 1970s has been virtually identical to those in Portugal and Turkey—the two countries in this group most similar to Yugoslavia in general developmental characteristics. Policy efforts to control inflationary pressures in Yugoslavia during the 1970s involved an apparent short-run tradeoff between real growth and price stability. Such tradeoffs have been a feature of the Yugoslav system since the late 1950s, when the first cycle of rapid growth and rapid inflation followed by a policy-induced slowdown began. Since then, Yugoslav economic performance at the macro level has been characterized by stop-go cycles reminiscent of the British cycles after which they are named. These cycles 74

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