Why The Development of Yugoslavia Deviated Form The Socialist Self-Management Market Economy

Why the Development of Yugoslavia Deviated from the Socialist Self-Management Market
Economy
Author(s): Aleksandar M. Vacić
Source: Eastern European Economics, Vol. 25, No. 2, Yugoslav Perspectives on the
Self-Management Economy and East-West Trade (Winter, 1986-1987), pp. 3-21
Published by: Taylor & Francis, Ltd.
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ALEKSANDARM. VACIC
Why the Development of

YugoslaviaDeviated from the
Socialist Self-Management
Market Economy*
Judging from policy documents adopted in Yugoslaviaover the past

twenty-five years, it can be concludedthat the long-termdevelopment
programof the Yugoslaveconomic system was foundedon a theoreti-
cally unexpectedbut historicallynecessary amalgamationof a market
economy and socialist self-management.This gave rise to the creation
of a historically novel type of system-the socialist self-management
marketeconomy. Such an orientationwas not accidental;rather,it was
basedon knowledgeacquiredthroughexperience, which indicatedthat
such an economic system ensuresa more rapiddevelopmentof national
productive potential, a more intensive and accelerated integrationof
the Yugoslavinternaleconomy, its broaderand more effective partici-
pation in the internationaldivision of labor, as well as faster develop-
ment of socialist self-management. The Law on Associated Labor,
adoptedat the end of 1976 in accordancewith this long-term orienta-
*Serbo-Croatiantext ? 1983 by the Leagueof Communistsof Yugoslavia.

"CiniociodstupanjarazvojaJugoslavijeod socijalistickesamoupravnerobnepriv-
rede," Socijalizam,1983, Vol. 26, no. 11, pp. 1619-1634.Translatedwith per-
mission.
AleksandarM. Vacic is deputydirectorof the GeneralEconomicAnalysis
Divisionof the EconomicCommissionfor Europein Geneva.
To makethe text more understandable for English-speakingreaders,the au-
thorhas editedthe Englishversionand addeda few new sentences,appearing
primarilyin footnotes.These have been markedin the text by asterisks.El-
lipses enclosedby brackets[. . .] have been used to indicatea few places
wheresome outdatedor excessivelydetailedsentenceswere omitted.
4 EASTERN EUROPEAN ECONOMICS
tion, was conceived in such a manneras to bring into effect a socialist

self-managementmarketeconomy. At the sametime, it was expectedto
go beyond a marketeconomy in the long term throughan intensifica-
tion of linkages between the activities of organizationsof associated
labor,via the pooling of labor and resourcesundera self-management
system.
The evolution of economic relations in Yugoslaviain recent years
has, however,takena completelydifferentdirection. Towardthe end of
the 1970s, and especially in the early 1980s, the logic and mechanism
of the marketeconomy have been increasinglysuppressed,andthe free
activityof socialist self-managementproductionunitshas been restrict-
ed. There was a trend among the country's constituent sociopolitical
units, primarilyrepublicsand (autonomous)provinces, to turninward.
This was reflected in a constantdecline of the shareof productionsold
outside their own territoryand, conversely, in a fall in the share of
requirementspurchased outside their territory. These developments
paralleled a decrease in Yugoslavia's share of world trade, reflecting
above all a decline in competitiveness. Finally, empiricalanalyses, as
well as several political documents, have indicateda growing stagna-
tion in the developmentof self-management.
Duringthe years immediatelyfollowing the adoptionof the Law on
Associated Labor, two main interpretations were given to the
divergences which developed between actual economic relationships
and the system prescribed in the new law. The first referred to the
extent and depth of the changes the Law introduced into Yugoslav
social practice. The second pointedout the inertiaprevailingin internal
economic relations up to that time and the resistanceof social forces,
whose positions, acquiredunderthe previoussystem, were threatened.
As time passed, boththese interpretationsof differencesbetweenactual
relations and the system establishedby the Law on Associated Labor
seemed to lose validity, while the differences themselves gradually
became broader and deeper. Nevertheless, the main social forces in
Yugoslaviahave continuallystressed their full commitmentto the de-
velopmentof social relationsin accordancewith constitutionalchanges
and the provisions of the Law on Associated Labor.The identification
of the realunderlyingcauses of this divergencebetweenactualeconom-
ic relations in Yugoslavia and the orientation laid down for them in
political pronouncementsand changes in the legal framework has,
therefore, become a crucial issue for furtherdevelopment.This is all
WINTER 1986-87 5
the more important,since in the meantime, a very pronounceddecline

in the rate of economic growth has occurred. It was accompaniedby a
continuous increase in the numberof persons seeking employment, a
decelerationin the growth of labor productivity-and even declines in
absolute terms in certain years-falling living standardsamong the
employed, an accumulation of foreign debt to proportions which
threatenthe country'sinternationalsolvency, as well as structuralprob-
lems so grave that the economic activity of certain sectors has been
completely disrupted.
Bearing this in mind, it is not surprising that practically all of
Yugoslavia'ssocial forces have been mobilizedto identify the causes of
unfavorableeconomic developmentsin the countryover the past two or
threeyears. In orderto providea global insight into these causes, andat
the same time to develop a comprehensivelong-termstabilizationpro-
gram, a Commission on Problems of Stabilizationwas set up at the
beginningof 1982. It prepareda documententitled "Basic Featuresof
the Long-Term Economic Stabilization Program" in the spring of
1982. This documentwas followed by numerousspecial studies which
dealt with particular aspects of the country's economic and social
development.At the beginningof July 1983, the final documentof the
Commissionwas adopted.It establisheda startingpointfor introducing
substantial modifications in the economic system, economic policy,
and economic development.Its contentand scope was such thatrumors
from many quarterspredictedthata far-reachingeconomic reformwas
under consideration.
A large numberof professionalanalyses, as well as numerouspoliti-
cal documents, have attemptedto evaluatechanges in economic rela-
tions in Yugoslaviaover the past years. From a political and economic
standpoint,a key question seems to be why Yugoslaviahas deviated
from a socialist self-managementmarketeconomy, which, despite un-
deniablecontradictionsand variousproblems, has yielded results over
a number of years that have enhanced the country's reputationas an
open, dynamic, democraticallyorganized, and efficient economy. In
fact, in its heyday the "Yugoslav model" provided a novel economic
option within a world framework.
The available facts suggest, although it is acknowledgedthat other
interpretationsare possible, that the causes of the deviations in the
developmentof Yugoslaveconomic relationsfromthe course laid down
in the establishedlegal frameworkfall underfour headings: economic
development itself; economic policy; the economic system; and ex-

traneous, i.e., international,circumstances.These will be briefly ex-
amined in turn.
1. Structural economic disequilibria
Theoretical investigationsusually take a given economic system in its

pure form as a point of departure,relegatingthe-influenceof the state
and other macroeconomicagents to a secondaryrole. Nevertheless, in
present conditions no economic system-either in the East or in the
West-operates as a perpetuummobile, a self-correcting mechanism
capableof reconcilingall currentand long-termeconomic phenomena.
Accordingly,economic theory in Yugoslaviaacknowledgesareaswith-
in which the socialist self-managmenteconomy also requirescertain
essential guidelines involving macroeconomicdecisions determining
the general orientationof economic development. These include the
pace of economic growth, basic economic structures,foreigneconomic
relations, overall allocationof the nationalincome to consumptionand
accumulation, regional economic development, and the like. Such
guidelines shouldprovide a frameworkfor currenteconomic policy on
the one hand, and the limits within which microeconomicagents must
work on the other. This simple truth is not publicly contested in
Yugoslavia. However, it is a fact that such a policy in effect has not
existed for quite a numberof years. This has given rise to four types of
structuralproblems in Yugoslavia.
a) Discrepancybetweenthe raw material energy base and manufac-
turing capacity. The first stage of industrialization,which may be
consideredas having lasted until the mid-1950s, was completedwith a
fasteraveragerateof raw materialsandenergy productiongrowththan
was the case with manufacturing.' Over the next 25-year period,
Yugoslaviaexperiencedtwelve years when the growthof the manufac-
turing sector exceeded raw material and energy production, seven
years when the productionof raw materialsmatchedthat of manufac-
turing, and only six years when raw materialsoutputexceeded that of
manufacturing.2In three of its five-year plans (1966-1970, 1971-
1975, and 1976-1980), Yugoslavia targeted a relatively more rapid
developmentof energy and raw materials, which was not attained. In
the period 1963-1970, manufacturinggrew one-third faster than the
outputof the extractiveindustries.The relationshipremainedpractical-
ly unalteredduring 1970-1980.3 This long-termimbalanceresulted in
WINTER 1986-87 7
a considerablegrowth of importdependencein a numberof areas and

for the economy as a whole.
b) A growingforeign tradedeficit. The growthof importdependence
due to the non-correspondencebetween the structureof supply and
demand led to a further type of structuralimbalancein Yugoslavia's
economy: growing deficits in the balance of trade. Although
Yugoslaviahas had negative tradebalancesduringthe whole post-war
period, deficits remainedwithintolerablelimits up to the mid-1960s. In
the entire 20-year period 1947-1966, the tradedeficit (calculatedat a
US dollar rate of 27.30 dinars), averagedno more than $20 million a
year. The average export/importratio over the same period was 70.5
percent. But as earlyas 1967-1972, the tradedeficit attaineda different
order of magnitude, its growth having been almost exponential after
1967. Consequently,the averagetradedeficit in those years, calculated
at the same dollar exchange rate, grew to more than $850 million. It
reached nearly $2.5 billion in the following five-year period and
jumpedto as muchas $6.2 billion annuallyin 1977-1981. It reachedan
all-time record of $7.2 billion in 1979. The export/importratio de-
clined to 63.7 percent in 1967-1971, to 58.8 percent in 1972-1976,
and in 1979, for the first time in 26 years, it fell below 50 percent. This
had previouslyoccurred only twice, in 1951 and 1953.4
c) Growingforeign indebtedness.As long as Yugoslavia'stradedefi-
cits remained within reasonable limits and the export/import ratio
varied around 70 percent, the gap was largely covered by invisible
earnings-notably tourism, transportationand insurance,construction
work abroad, and emigrantworkers' remittances.Thanksto this, for-
eign debt rose only graduallyand presented no crucial problems. In
fact, the country's gross debt did not exceed $2 billion until 1969,
while net indebtedness(gross debt minus claims on other countries)in
thatyear amountedto slightly over $1.7 billion. But the rapidincrease
in the foreign tradedeficit, as well as the acceleratedgrowthof overall
public (social) consumption as compared with the national product,
began to push up the country's debt at a very fast rate beginning from
1971. In fact, it expandedat an averageannualrate of 22.8 percentup
to 1980, andthe country'soverall gross debt for the first time exceeded
$20 billion (aproximately$18.6 billion net) by 1981.1 The size of the
foreign debt was accentuatedby a deteriorationin terms of trade, and
an unprecedentedincrease in internationalinterestrates-to which we
will return later-has considerablyincreased the debt-servicing bur-
den. Whereas during the entire postwar period Yugoslaviaenjoyed a
reputationas a country that regularlyfulfilled its obligations, it now

finds itself confrontedwith a problem of internationalsolvency. Fur-
thermore,in terms of foreign debtper capitaYugoslaviais now consid-
ered one of the most heavily indebtedcountriesin the world. Thus, the
main economic policy objective of Yugoslaviaat the presenttime is to
ensure regular debt-servicing payments.
d) Distortions in the level and structureof consumption.For some
time, the rise in foreigndebt allowed Yugoslaviato consumemore than
it produced. Thus, despite the fact that five-year plans envisaged
slower growth of final domestic demand(includinginvestmentexpen-
ditures) as compared with national output, final consumption in
Yugoslavia in 1971-1975 rose on average by 7.6 percent annually,
while in 1976-1980 it even grew by 8.3 percentmore thangross social
product. In the critical year of 1979, Yugoslavia's consumptionsur-
passed its productionby as much as one tenth.6 The divergence be-
tween consumptionandproductiongrowthratesled, in turn, to signifi-
cant changes in the structureof final consumption. The size of these
imbalancescan best be perceived if changes in the end-use structureof
the social productare looked at over a longer-termperspective. While
the aggregate share of private and public consumption in the social
product was below 60 percent until the economic reform of 1965
(1964-57.9, and 1964-59.6 percent.), it attained but two-thirds,
following the reform, toward the end of the 1960s (1968-66.5 per-
cent).7 During the 1970s the share continued to grow constantly.By
1971-1975 it averaged 75.3 percent, while in 1976-1980 it reached
77.6 percent. The culminationcame in the period 1976-1978, when
privateand public consumptionreachedalmost four-fifths(79 percent)
of the social product.8
Although the decline in the share of accumulationjeopardizedthe
real accumulationprocess, investmentcontinuedto grow at a very high
rate; it even increased its share in domestically-usednational income
from an average of 30.5 percent in 1966-1975 to 34 percent in the
period 1976-1979.9 In other words, investmentin Yugoslaviaexpand-
ed independentlyof the country's real possibilities.
The consequencesof these developmentsbecameapparentas soon as
it was recognized that the rise in indebtednesshad to be checked.
Unrealisticallyhigh growthratesof the social product-which reached
8.0, 6.9, and 7.0 percentin 1977, 1978, and 1979, respectively-were
followed by drasticallyreducedrates of only 2.3 percentin 1980, 1.5
percent in 1981, and only 0.7 percent in 1982. In 1983, for the first
WINTER 1986-87 9
time in almost threedecades, the social productof Yugoslaviacontract-

ed (by 1.3 percent), thus markingthe sharpestdecelerationin national
output ever recorded in the country's postwar history.10
These trends in the growth of the social product, coupled with the
need to restricttotal final consumptionto a level below thatof currently
produced national output, led to decreases in all types of final con-
sumption. This primarily affected investment, but also private and
public consumption. A strict austerityprogram, envisaging a decline
over several years in real incomes and in the standardof living, thus
appearedto be the unavoidable-although entirely predictable-price
to pay for excessive past borrowing and uncontrolledincreases in all
types of consumption." Structuralimbalances within the economy
itself, which could no longer be compensatedby imports, led to short-
ages of a wide range of raw materials and of certain foodstuffs. In
certain areas Yugoslaviahad to returnto the system of materialbal-
ances and rationing to allocate resources. However, these measures
characterizea level of developmentfar below that of a marketecono-
my-the reason that Yugoslavia, correctly,abandonedthem three dec-
ades ago. The fact that they had to be re-introducedat the level of the
smaller sociopolitical units (republics and provinces and, in some
cases, communes) does not palliate that fact, since the unity of the
Yugoslav market-which is a precondition for the operation of the
socialist self-management market economy-had thus been jeopar-
dized or had indeed broken down.
2. Currenteconomicpolicy
Althoughthe featuresof developmentpolicy describedabove explaina

considerablepart of the deviationof economic developmentsfrom the
orientation laid down by the Law on Associated Labor, it must be
stressed that grave weaknesses in the conduct of current economic
policy also contributed. The most importantamong them are listed
below:
a) In implementingthe Law on AssociatedLabor,to dateno provision
has been made to respect the principle of ensuring the formation of
resources for collective needs and public consumptionin line with the
expansionof the social product. In fact, the Law requiresthatdemand
for such resources should be considered and evaluatedsimultaneous-
ly-as a rule, once a year-in the basic organizations of associated
labor.However,ever since the Law was passed, sociopolitical commu-
nities (federation, republics, provinces, and communes) have appro-

priatedfundsby theirown autonomousdecisions withoutthe necessary
coordination among themselves or with associated-laborenterprises.
Furthermore, fears that self-management interest communities*
would, in the absence of real linkages between economic and
noneconomic activities, take upon themselves the role of arbiterand
independentdecision-makerconcerning the raising of public funds-
fears expressed at the time the Law was passed-have been justified.
Thus, the cumulativeoutcome of raidingenterpriseincomes for public
needs engendersthreenegativeeffects:first, the sums raisedhave been
beyond the economy's capacity;'2 second, the criteria for taking up
such funds differ between republics, provinces, and other, smaller,
sociopolitical units; and third, as a result of this, the financialposition
of enterprises,andof the workersemployedtherein,has become differ-
entiated, even when there is no apparentbasis for this.
b) The Lawon AssociatedLabordelegatesthe determinationof crite-
ria for allocatingenterprisenet incomet andfundsfor personalincome
to self-managementagreementsand social compacts. This shouldhave
entailedthe timely conclusion of social compactsin these areas-at the
latest within a year of the adoption of the Law on Associated Labor.
However,only two compacts had been concludedat the republiclevel
before the establisheddeadline (January1, 1978). The inter-republic
compacton the same issues, which shouldhave been reachedfirst, has
yet to be concluded. In fact, an initiative for its adoption (since the
previouscompact,concludedin 1975, was cancelled by the adoptionof
the Law on Associated Labor) was launchedonly at the beginning of
1983. Thus, the practice of allocating net income and distributing
resourcesfor personalincomes began and, in practice, has so far been
implemented without the requisite economic apparatusand, conse-
*Associations of organizationsengaged in the economic, i.e., materialsphere

and those supplyingsocial and public services. They may be formed at local, i.e.,
communal, regional (provincial), republican,and in some cases also at federal, lev-
els. Altogether there are now more than 7,000 of them.
tAll revenuesof each organizationarise from their sales (ukupanprihod). The
deduction of intermediatecosts and statutorilyprescribeddepreciationcharges
yields the gross income (dohodak)of the organization.This is usually interpretedas
the most importanteconomic category of the self-managementmarketeconomy,
though this view has not been generally shared in Yugoslaveconomic theory. When
all taxes and contributionsare paid, including those to the self-managementcommu-
nities of interest, the remainingpart of income representsthe net income (Nist
dohodak) of the organizationof associated labor. For furtherdetail, see Aleksandar
Vacic, Ekonomskapolitika Jugoslavije-Op$ta pitanja ekonomskepolitike, Bel-
grade: "Savremenaadministracija"Publishers, 1985, pp. 172-229.
WINTER 1986-87 11
quently, without the necessary coordination at the national level.

This has had threenegative consequences.First, the rateof accumu-
lation droppedbelow its potential(i.e. fromthe higherlevel obtainedin
former years, as mentioned earlier); it has also remainedbelow the
level needed, which is why investments have been increasingly fi-
nanced from foreign borrowing. Second, the criteriaapplied in enter-
prises (as well as in the republics and autonomousprovinces) have
differed not only in detailbut also with regardto certainkey yardsticks
(for instance, whether or not the value of fixed assets per worker is a
relevantfactor in allocating net income). These two consequences led
to a third:personalincomes of workersin certainenterprises,in differ-
ent groupsandbranches,andalso in the varioussociopoliticalunitsalso
varied in ways which cannot be justified in terms either of the work
performed or the results of that work.
c) The financingof demandby an increasein foreign debt at a certain
period called for very active monetary,credit, fiscal, foreign tradeand
foreign exchange policies. Apart from monetary and credit policy,
which by definition has primarily linear effects, the other areas of
currenteconomic policy remainedunderdeveloped.Thus, internalde-
mandgrew independentlyof actualproduction.Productionfor exports
was discouragedby the unrealisticforeignexchangerateof the national
currency (dinar). This is why Yugoslavia failed to ensure the export
expansionneededto generateresourcesfor foreigndebt servicing in the
late 1970s; in addition, it also lost marketpositions alreadyacquiredon
the world market, especially in the convertible currency area.'3
d) Weaknesses in fiscal, foreign trade, foreign exchange, and in-
comes policies also intensifiedweaknessesof currenteconomic policy
towardsdevelopmentplans. In fact, manyagreementscritical to ensur-
ing the developmentpolicies envisaged in the nationalplans have not
been concluded at all, while considerablenumbersof those that were
concluded were not implemented. This intensified existing structural
problems.
3. The economic system
The foregoingdemonstratesthatthe new economic system embodied in

the Lawon AssociatedLaborwas not supportedby appropriatelydevel-
oped policies towards currenteconomic management.Instead, an ad
hoc hybrid system was created which mixed together mechanisms
based on the logic of a self-managementmarketeconomy with mecha-
nisms createdand developedoutside it and often contraryto this logic.

Thus, economic practice, under pressure from these expedients, be-
came merely a surface reflection of self-managementrelations. How
the legitimate economic model was graduallyreplacedby anotherhas
as yet found no generally accepted answer in Yugoslavia. However,
among the factors leading to this, four were decisive:
a) As the Law on Associated Laborintroducedsubstantivenovelties
into economic life in virtuallyall areas, its comprehensiveimplementa-
tion called for the appropriaterevision, in a relatively short period, of
all the other regulationsconcerningeconomic life. After the adoption
of the Law, however, attempts to make the new economic system
operationalcame to a standstill. In fact, a numberof crucial laws (for
example, the Law on Planning)were not alteredat all. Manyof the new
laws which were passed touched only on institutionalaspects of the
system throughsets of new agreementsand compactsor self-manage-
ment interestcommunities. Thus, the most importantdimensionof the
Law on Associated Labor-the criteriaand parametersfor regulating
relations between associated-laborenterprises-in fact remained the
least developed.
b) The logic of the Law on Associated Laborcalled for sociopolitical
communities (the federation, republics, and provinces, and also com-
munes)to act primarilyin responseto the need to coordinateinterestsof
associated-laborenterprisesandnot as autonomouseconomic decision-
making agents. However, in real economic life the responsibilitiesof
sociopolitical units, especially of republics and provinces, grew in-
creasingly broad and were exercised more and more directly. They
became the decisive element in the sphereof investmentand expanded
social reproduction.This tendencywas reinforcedby the fact that the
banksthroughwhich the majorportion of investmentis financedwere
also organizedwithin the boundariesof individualsociopolitical com-
munities and are mostly under their direct, though informal, control.
c) The transformationof sociopolitical units into principaldecision-
makingagents in expandedreproductionrelegatedto a secondaryposi-
tion joint action by associated-laborenterprisesandthe pooling of their
resourcesalong the lines of the reproductionlinkage betweenthe orga-
nizationsthemselves. It also boosts regional linkages within particular
sociopolitical units.'4 The free circulation of available funds, which
had themselves declined to below potentialand necessarylevels owing
to factorsalreadydescribed, was almostcompletelysuppressed.In this
WINTER 1986-87 13
manner,the pooling of labor and resources based on joint domestic

ventures, which was expected not only to balancethe marketsituation
more rapidlybut to also remove structuralimbalances,developed only
marginally,and then mainlywithin the confines of individualrepublics
and provinces.
d) Finally,it mustbe admittedthatthe suppressionof the mechanisms
set up by the Law on Associated Labor Act was in part also a conse-
quence of its own weaknessesand contradictions.A generalevaluation
of the phenomenonis offered at the end of this paper.But at this point it
should be noted that some of these weaknesses were fundamental,as
becameclear soon afterthe Law had been passed in 1976. Let us give a
few examples. First, the Law envisages ways in which organizationsof
associated labor earn their revenue:sales of goods and services on the
home and foreign market; the pooling of labor and resources*; free
exchangeof labort; and revenuesbased on subsidies, awards, compen-
sations, and otherpaymentsby governments.Except for sales, howev-
er, criteria for these items have never been made clear, and thus, the
position of many organizationsin respect to earnings was left uncer-
tain. On the other hand, income earned by organizations in the
nonmaterialsphere was in fact considered to be completely equal to
income earned throughsales, which is not true, as the latter refers to
primaryincomes while the formerrepresentsan outcomeof redistribu-
tion of primaryincomes earnedby organizationsin the materialsphere.
Thirdly,one of the mainnew categoriesof the system, accordingto the
Law, is net income of the organizationof associated labor. In fact this
means that part of its income remainingafter all tax and other deduc-
tions. Allocation of net income to personal incomes and accumula-
*The pooling of labor and resources includes all kinds of joint undertakingsin-
volving two or more basic organizationsof associated labor. The Law on Associated
Labor distinguishes between the two main variantsof such undertakings.In the
first, each organizationpools both labor and financial resources, including fixed as-
sets. The result of such pooling is joint productionand, thereafter,joint sales
(zajednickiprihod). In the second, however, one organizationmakes available both
labor and resources, while the others contributeonly financial resources and, on that
ground, have a right to participatein the income of the former. The result of such
pooling is therefore called joint income (zajednickidohodak). For more details, see
Vacic, Principi i politika dohotka, Belgrade, "RadnickaStampa" Publishers, 1981,
pp. 255-391.
tFree exchange of labor can briefly be defined as income earned by organiza-
tions in the nonmaterialsphere throughcontributionsof the organizationsof the ma-
terial sphere and jointly determinedby both-either directly or within the corre-
sponding self-managementcommunitiesof interest. For more details, see Vacic, op.
cit., pp. 423-446.
tion-which has to be done on the basis of commoncriteriadetermined

in social compactsand self-managementagreements-depend, among
other things, on the level of net income per worker. However, this
criterioncould not be properlyapplied, as the rules for the determina-
tion of net income itself have neverbeen settledon a standardizedbasis
throughoutthe country.Thus, "net income" may in fact mean some-
thing quite different in different organizations.
The otherweaknessesare of a more technicalnature,althoughsome
of them have wide-rangingconsequences. For example, Article 146 of
the Law on Associated Labor stipulates that every associated-labor
enterprise conducts business through its own independentbank ac-
count. This has led to a significant deceleration in the circulation of
money and, by the same token, in overall economic efficiency. Not
unexpectedly,the Federal Executive Council launchedan initiative in
1983 to amend this article.'5
4. International economic conditions
Yugoslavia's economic difficulties of recent years are also partly the

consequence of changing and, in many respects, worsening interna-
tional conditions. Among the factors which have had a particularly
harmfuleffect on Yugoslavia,the five most importantare as follows:
First, Yugoslavia'sexport prices in recent years have risen slower
thanthe prices of its imports.The terms of tradegraduallydeteriorated
by about nine percent over 1971-1981.16
Second, starting in 1973 there was a considerable rise in energy
prices, and the shareof fuels in the total value of Yugoslavia'imports,
which ranged from 4.8 to 5.5 percent in 1968-1972, grew consider-
ably. The sharebegan to rise immediatelyafter the first "oil shock" of
1973, and in 1980 and 1981 it exceeded23 percent.17The impossibility
of substitutingimported fuels by those from domestic sources in the
short term thus narrowedimportcapacitywith regardto other material
inputsand, consequently,also preventedmore rapideconomicdevelop-
ment.
Third,in the late 1970s and early 1980s a prolongedrecession took
place in the developed Westerneconomies. This considerablyreduced
possibilities to expandYugoslav exports and also narrowedthe scope
for improving the balances of trade and of overall payments.
Fourth, the decelerated growth in the developed West European
countriesemploying significantnumbersof Yugoslavworkershas led
WINTER 1986-87 15
duringthe last ten years or so to a gradualreductionin the numberof

Yugoslavworkersemployed in these countries-from about1.1 million
in 1973 to about760,000 in 1982.18 The returnof emigrantworkersnot
only affected domestic unemploymentin Yugoslaviabut at the same
time reduced foreign exchange revenues from workers' remittances.
Fifth, in the late 1970s and early 1980s there was a markedincrease
in world interest rates which increased Yugoslavia's debt-servicing
obligationson foreigndebt. The debtcontinuedto grow, moreover,as a
result of rising tradedeficits over the past three years. In fact, interest
paymentsin 1982 were almost three times larger than in 1979-$1.8.
billion comparedwith $0.6 billion. 19
All the factors mentioned above, as well as others, had negative
effects on Yugoslavia'sdevelopment,and thus on its capacityto func-
tion normally.But while bearing in mind these circumstances,it must
be pointed out that their influence was not decisive. The internal
weaknesses discussed previouslyhad a much strongereffect than did
the unfavorableexternalconditions. The role of the latter was primar-
ily to expose and intensify weaknessesin Yugoslavia'sdomestic devel-
opmentfaster thanwould otherwisehave been the case. In makingthis
assessment, we are asserting that with timely and appropriatechanges
in development,currentforeign trade, and foreign exchange policies,
Yugoslaviacould have adjustedto changes in the internationalclimate
to a much greater extent than was actually the case. Its reactions to
these changes (for example, to the rise in oil prices) were incomparably
slower and smaller than was the case in most countries in a similar
situation.
5. Some tentative conclusions
The foregoing highlights certain elements relevantto the future func-

tioning of the Yugoslaveconomy and its relationshipswith the market
economy. However,before turningto this, we must returnto the ques-
tion raised at the beginning of this analysis: why did actual develop-
mentdiverge from the system set up by the country's own laws? It can
be argued that the divergence occurred both because of unfavorable
internationalcircumstancesand also because of the unbalancedstruc-
ture of national output, the weaknesses of current economic policy,
and, last but not least, because of deficiencies in the economic system
itself. With regardto the latter,the principalreason for the divergence
of presenteconomic outcomesfromthose expected lies primarilyin the
16 EASTERNEUROPEANECONOMICS
fact thatthe Law on AssociatedLaborlargelyregulatesthe functioning

of the organizationsof associated labor themselves. However, their
overall economic and social position resultedfrom factorsover which
the Law on Associated Laborhad little or no influence. Such a conclu-
sion is supportedalso by broader,politico-sociological analysesof the
functioningof Yugoslav society, from only one of which we shall cite
the fundamentaltheses:
-"The system did not respectthe principlesof the functionalorgani-
zation of associated labor,* which can best be seen from the creation
and role of associated-laborrepresentation("Houses of Associated
Labor") in the parliamentarysystem.
-Associated laborremainsdependentto a considerableextenton the
political decision-makingcenters, which are the principal source of
power of the political and administrativecircles.
-According to the concept of sociopolitical communities,the inferi-
or position of associated labor should have been protectedto the last
detail throughthe institutionalizationof its interests.It turnedout that
the (over)-protectedinterests were the partial and presupposedones
ratherthan the real, long-term interests of associated labor.
-By protecting every particularinterest-giving each equal status,
introducingconsensus everywhere-considerable obstacles were cre-
ated for the manifestation of the genuine, historical interest of the
workingclass. This is why intermediaries-the administrativestrata-
successfully impose their interests as general ones.
-In dismantlingthe power of the state, decentralizationfavors the
individual, but it in fact created a multitude of new state powers-
republic, provincial, municipal (polycentricstatism).
-The evolutionof sociopoliticalcommunitieswent from the prepon-
derance of the federation, and to a certain extent, of districts (com-
munes), to a situationin which the balanceof powerhas shiftedentirely
to the republicsand provinces. The powers of the republicsas sover-
eign states and the autonomyof the provinceshave been strengthened,
and the provinceshave been put on an equal footing with the republics
in many instances.' '20
The validity of this assessmentt is confirmed by very similar ap-
*In current Yugoslav vocabulary,"associated labor" usually refers to organiza-

tions of associatedlaborthemselvesor to the workersemployedwithinthem. As such,
it is related to the administrative (bureaucratic)and management (technocratic)
spheres.
tlt seems that the assessments made by N. Pagic are sharedby a large numberof
otherYugoslavpolitical scientists: "The basic cause, andthereforethe maincharacter-
WINTER1986-87 17
praisals also voiced in the highest state and political bodies of

Yugoslavia, within the framework of a critical examination of the
existing situation and of ways to overcome it.21
Finally,when discussing the directionsthatshouldbe taken, and the
changes necessary, to return Yugoslavia to its long-term orientation
toward a socialist self-managementeconomic system, it appearsclear
that measures will have to encompass action in the following areas:
First, changes in the foreign tradeand foreign exchangesystems are
indispendablein orderto ensurethatYugoslaviameets its international
obligations in a timely manner, as well as to ensure a stable link
between internal and external economic flows.
Second, an efficient apparatusfor the formulationand implementa-
tion of currenteconomic policy is neededfor timely decision-makingat
the nationallevel. The revivalof economic activity dependson: reduc-
tion of domestic consumptionwithin the limits of availableresources
and suppressinginternalnonliquidity;effective control of the volume
and structureof internal demand; reduction of inflation to tolerable
proportions;and supplementaryaction in a numberof other areas of
economic and social life.
Third,availableinvestmentresourcesmustbe concentratedon items
which will remove structuralimbalances and ensure the reactivation
and fuller utilization of the country's economic capacities.
Fourth, a comprehensivenationwidedevelopmentpolicy is needed
to ensurea broader,faster,and more efficient Yugoslavparticipationin
the internationaldivision of labor. In particular,the real comparative
advantagesof republics and provinces should be identified so as to
encouragea mutualdivision of laborandclose cooperation.This would
ensure that their productioncapacities are complementary,ratherthan
competitive, as they largely are today.
Fifth, the existing economic system must be revised, first of all to
remove as soon as possible its weak points, while at the same time
creatingthe theoretical, political, and legal foundationsfor establish-
ing a comprehensive socialist self-managementmarket economy.
These directions have, in fact, been followed in the Long-Term
Program of Economic Stabilization, examined in July 1983 by the
istic, of the crisis of Yugoslavsociety is the crisis in the ideological andpolitical sphere;
the economic crisis actually plays the smallest role." This was, in short, one of the
principalmessages of the FourthCongress of YugoslavPolitical Scientists, held in the
last week of June 1984 in Belgrade's "Sava" Congress Center." Ekonomskapolitika,
June 1984, no. 1681, p. 14.
country's highest political bodies-the Federal Conferenceof the So-

cialist Alliance of the WorkingPeople, the CentralCommitteeof the
Leagueof Communistsof Yugoslavia,the YugoslavFederalAssembly,
andothers-as well as in the correspondingorganswithinthe republics
andprovinces. The FederalAssemblyof Yugoslaviaconcludedthatthis
programrepresents"a unique social plaform for the activationof all
social agents towardsa more rapidresolutionand overcomingof exist-
ing difficulties and towards the achievement of stable, continuous
social development on the basis of socialist self-management."22 In
keeping with this, the FederalExecutive Council (federalgovernment)
and other federal bodies are obliged to prepareand submitas soon as
possible an appropriatesystem and other solutions and measures for
overcomingunfavorableeconomic conditionsto bringaboutthe timely
establishmentof currenteconomic policy, as well as furtherchanges
stemming from the Long-TermProgram of Economic Stabilization.
One roundof changeshas alreadytakenplace. They primarilyconcern
foreign economic relations, as Yugoslavia'sforeign debt situationand
its current overburdenedbalance-of-paymentscall for establishing
withoutdelay an operative mechanismto ensure regularsettlementof
the country's obligations toward foreign countries.23This covers to
some extent the first set of issues listed above. Changes were also
introduced, or were hinted at, which would leave room for a more
comprehensive, balancedeconomic policy at the national level, with
particularemphasis being placed on the implementationof constitu-
tional rights and on the role of the Federal Executive Council and the
NationalBankof Yugoslavia.Activities requiredfor the revisionof the
medium-termdevelopmentplan up to 1985 are also under way, and
importantchanges in the country's economic system have also been
announced.However,their scope and rangestill cannotbe determined
with certainty.
These already initiated changes are not at all simple. One should
particularlybear in mind here three complex reasons. First, the inter-
nationalcircumstancesin which these changes are to be carriedout are
not favorable, although neither are they unfavorableto the extent to
which they could have been given trendsin the world economy during
1980-1982.24 Second, the large imbalanceaccumulatedover the years
in foreign economic relations will necessitate a fall in the growth of
overall consumptionover several years to rates below the level of the
growth of social product.This will includea temporarydecline in real
incomes and living standardsfor virtuallyall employedpersonsand for
the entire population. Since they will at the same time be expected to
WINTER 1986-87 19
make exceptional efforts in using work time in order to use available

capacities and productionmaterialsto their fullest extent, some psy-
chological (andnot only psychological)resistanceto change, conscious
or unconscious, can be expected.25 This is why it was extremely
importantthat the facts concerning foreign economic relations were
communicatedto the public in their entirety. However, it is equally
importantthat this same critical analysis of other dimensions of eco-
nomic life-current economic policy, long-term economic develop-
ment, and the economic system-should maintainand heighten aware-
ness thatfurtherchangesare indispensableandthatthe reasonfor these
changes is not the orientationnow taken by Yugoslav society but the
attitudes that were, consciously or unconsciously, formed during the
1970s. Third,and finally, it must constantlybe kept in mind that such
changes requiretime, perseverance,and an awareness that this is the
only way in which the countrycan createfor itself more rapidand more
balancedeconomic growth prospects, an increase in personal and so-
cial standards,and the conditions for the real developmentof socialist
self-management.To that effect, the scope and range of the necessary
changes in Yugoslaviasurpassthe frameworkof the Long-TermPro-
gram of Economic Stabilization26and requirea critical re-examination
of all aspects of the country's entire postwar development.
Notes
1. Duringthe period 1947-1956, the productionof reproductionmaterialgrew at
an average annualrate of 12.8 percent, while the productionof equipmentgrew at a
rate of 10.6 percent. Calculatedfrom StatistickigodisnjakJugoslavije 1963, p. 166.
2. StatistickigodisnjakJugoslavije1972, p. 160, andStatistickigodisnjakJugos-
lavije 1982, p. 263.
3. Calculatedfrom Statisticki godisnjak Jugoslavije 1981, p. 264.
4. All figures in this paragraphhave been calculatedon the basis of datapublished
in Statistikaspoljne trgovineJugoslavije 1981, Belgrade:FederalBureauof Statistics,
1982, p. 17.
5. All information in this paragraphcomes from the Bilten Narodne Banke
Jugoslavije, no. 5, 1982, p. 67 or has been calculated on the basis of it.
6. "Privrednibilansi Jugoslavijeza 1982. godinu," SaopstenjeSaveznogzavoda
za statistiku, no. 193, June 30, 1983, p. 1.
7. Privrednibilansi Jugoslavije 1964-1968, Belgrade: Federal Bureauof Statis-
tics, 1969, p. 10.
8. "Privredni bilansi Jugoslavije za 1982," p. 2.
9. Calculatedfrom Statistickigodi.snjakJugoslavije 1981, p. 160.
10. "Privredni bilansi Jugoslavije za 1982," p. 16.
11. Speaking on the same subjects, J. Florijan&i6,SFRJ Federal Secretary for
Finance, states: "From 1977 to 1981, the country annually spent approximately
3 billion dollars of foreign resources by taking loans, which went into personal in-
comes, investment,taxes, contributions. . . . It was spent on domestic consumption.
Now the situation is reversed. In terms of servicing earlier loans, Yugoslavia is
presentlylosing about2 billion dollarsof its net accumulationper year.This meansthat

in the coming years, up to 1987, we have to reduce internalconsumptionby thatmuch
if we want to honor our obligationstowardforeign countries" (Borba, July 25, 1983,
p. 7).
12. A specific reflection of the discord between economic developmentand taxes
raisedto financepublic services is the emergenceof revenuesurplusesof sociopolitical
communities in almost all years following the adoption of the Law on Associated
Labor. Despite the fact that slower growth of these revenues was called for in past
years, the phenomenon repeated itself in both 1982 and 1983. The findings of the
competentorgansin the FederalAssemblyalso testify as follows: "For the fourthtime
duringthe past year, the delegatesof the Council for Labor,Health, and Social Welfare
reiteratedtheiropinionconcerningthe revenuesurplusesof sociopoliticalcommunities
and self-managementinterestcommunities.They askedthemselves for the fourthtime
wherethese surplusesarise (the decision-makingand legal mechanismfor theirpreven-
tion have been in existence for a long time) and why they are not-given that they do
exist-channelled back to associated labor...." (Politika, July 20, 1983, p. 6).
13. Accordingto the findings of the EconomicCommissionfor Europe, duringthe
1970s all countriesof southernEurope increasedtheir share in OECD imports, with
the exceptionof Yugoslavia,whose sharein 1980 was below thatof 1970. This was not
the result of changes in the volume and structureof demandon this marketbut was the
consequence of the reduced competitiveness of Yugoslav exports in the late 1970s
("Recent Developments in East-West Trade," Economic Bulletin for Europe,
vol. 34, no. 4, December 1982, New York: Pergamon Press, pp. 511-512,
555).
14. This particularityand its impacton the balancingof relationswithin the frame-
work of social reproductionwas also emphasized in the statementof the Presidentof
the Federal Executive Council, Milka Planinc, to the Federal Assembly, when the
Long-TermProgramof EconomicStabilizationwas being consideredin July 1983. She
designated banks and sociopolitical communities as the principalagents in decision-
making and in securing the financing of investment, i.e., expanded reproduction:
"They failed, by the logic of their interestsand their perceptionof development,to set
up an adequateproductionstructure. . . . These agents are not capableof setting up a
new productionstructure,i.e. an intensive mode of productionand development.On
the other hand, there will be no economic stabilizationor export expansion without
changes by the principal agents in the process of development" (Politika, July 29,
1983, p. 5).
15. A proposal for the amendmentof the Law was tabled before the Federal
Assemblyon July 19, 1983. "The amendmentof the Law on Associated Laborenvis-
ages the deletion of Article 146 concerning the creation of currentaccounts in every
basic organizationof associated labor. It has been proposed to have a single current
account for the entire labor organization(enterprise),the explanationbeing that this
shouldcontributeto the rationalutilizationof financialresourcesandthe eliminationof
numeroustransactionsinvolving small amountsof money" (Borba, July 20, 1983).
16. Calculatedfrom the indices of importand export prices. Statistickigodisnjak
Jugoslavije 1982, p. 307.
17. Calculatedfrom data on the value structureof Yugoslav imports in terms of
theirend-use, or the utilizationof the importedgoods. StatistickigodisnjakJugoslavqje
1973, p. 219 and Statistickigodisnjak Jugoslavije 1982, p. 310.
18. Yugoslavia,OECD Economic Surveys, Paris: OECD, 1983, p. 68.
19. Ibid., p. 74.
20. Judgingby a newspaperarticle publishedin Borba, July25-26, 1983, p. 4, the
theses cited stem from a study by N. PaNi6on sociopolitical communities and the
socializationof politics, which was the theme of a discussion at the MarxistCenterof
WINTER 1986-87 21
the CentralCommittee of the League of Communistsof Serbia, to which this report

refers.
21. A similarevaluationis also containedin the conclusionsof the Ninth Session of
the LCY CentralCommitteedevotedto the Long-TermProgramof Economic Stabili-
zation, as well as in the remarksof several participantsin the discussion, and particu-
larly in the observationsof M. Kucan: "A certain type of political and administrative
supervision of associated labor on 'their territory' based on principles of decision-
making alienatedfrom associated labor with regardto what is and what is not in their
interests, and is, therefore, not permitted, is the reason for the emergence of what we
call territorialcapital, or the creation of republic or provincial capital. This is the
principalforce behindthe breakingup of the Yugoslavmarket.This kindof monopolis-
tic power exercised by the executive, legal, and political structuresover associated
labor is significant not only because it often prevents or prescribes association and
requiresonly investmentson its own territory,thus promoting irrationalintegration,
but primarily because its influence on the agents of economic policy prevents the
affirmationof economic impulsestowardsproductionbasedon economic logic instead
of voluntaryand subjective action" (Borba, July 26, 1983, p. 4).
22. Politika, July 30, 1983, p. 5.
23. In this respect, the principalconditions were ensuredby the Act on Paymentsin
Convertible Currency,the Act on Federal Guaranteeof Debt Servicing, the amend-
ments to the Act on Foreign Exchange Transactions,and the Decision on TotalCredit
Volumeto be takenby the NationalBankin 1983. These were adoptedat the session of
the Council of Republicsand Provincesof the FederalAssembly held on July 3, 1983.
The regulations cited establish, inter alia, a mechanism to ensure the regular
servicing of all foreign debts by all economic agents in the country,introducefederal
guaranteesfor new loans acquiredby the country (demandedby foreign lenders), and
regulate conditions governing further foreign borrowing.
24. Competent internationalorganizations such as the International Monetary
Fund (InternationalMonetarySurvey, June 13, 1983, pp. 161-166), the OECD (7The
OECD Observer, no. 123, July 1983, pp. 28-33), and others estimated in mid-1983
that world economic recovery was undoubtedlyunder way, primarilyin highly devel-
oped countriesin which the recession had first started. Most of these reports, however,
pointed out that this recovery had not been consolidated, given that the revival of
investment, on which the durationof this increase depends, was still limited. [ . .1
25. The presence, and partlyobjective causality,of such reactionswas pointedout
by M. Planinc, Presidentof the FederalExecutive Council. In her statementbefore the
FederalAssembly on the occasion of the adoptionof the law providing, inter alia, for
the country's regular settling of its obligations toward foreign countries, she stated:
"In the altered economic circumstances in the world, when the sources of possible
additionalforeign accumulationhave gone dry, and when, in order to rectify our own
situation, we had to close the vents from which unearnedresources flowed in, the real
situation emerged: it was a very difficult situation, precisely with regard to current
productionand reproduction.The extent to which current production was overbur-
dened also becamevery clear, as well as the fact that in such circumstances,economic
measuresand criteria are accepted and supportedwith great difficulty, sometimes
reactionto them is wrong, or they are not faced at all" (Politika, July 4, 1983, p. 5).
26. At a press conference held on July 19, 1983, V. Srzenti6, President of the
FederalAssembly,stated, interalia: "The years before us will show all the profundity
andfar-reachingcharacterof the changeson which we are aboutto embark,as we are at
present still incapable of grasping them in their entirety. I am convinced that these
changes will be deeper and farther-reachingthanwhatcan at presentbe surmisedfrom
the documents of the Commission on Economic Stabilization" (Politika, July 20,
1983, p. 5).

Why The Development of Yugoslavia Deviated Form The Socialist Self-Management Market Economy

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Why The Development of Yugoslavia Deviated Form The Socialist Self-Management Market Economy

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Why the Development of Yugoslavia Deviated from the Socialist Self-Management Market

Why the Development of

Judging from policy documents adopted in Yugoslaviaover the past

*Serbo-Croatiantext ? 1983 by the Leagueof Communistsof Yugoslavia.

tion, was conceived in such a manneras to bring into effect a socialist

the more important,since in the meantime, a very pronounceddecline

development itself; economic policy; the economic system; and ex-

1. Structural economic disequilibria

Theoretical investigationsusually take a given economic system in its

a considerablegrowth of importdependencein a numberof areas and

reputationas a country that regularlyfulfilled its obligations, it now

time in almost threedecades, the social productof Yugoslaviacontract-

Althoughthe featuresof developmentpolicy describedabove explaina

nities (federation, republics, provinces, and communes) have appro-

*Associations of organizationsengaged in the economic, i.e., materialsphere

quently, without the necessary coordination at the national level.

3. The economic system

The foregoingdemonstratesthatthe new economic system embodied in

nisms createdand developedoutside it and often contraryto this logic.

manner,the pooling of labor and resources based on joint domestic

tion-which has to be done on the basis of commoncriteriadetermined

4. International economic conditions

Yugoslavia's economic difficulties of recent years are also partly the

duringthe last ten years or so to a gradualreductionin the numberof

5. Some tentative conclusions

The foregoing highlights certain elements relevantto the future func-

fact thatthe Law on AssociatedLaborlargelyregulatesthe functioning

*In current Yugoslav vocabulary,"associated labor" usually refers to organiza-

praisals also voiced in the highest state and political bodies of

country's highest political bodies-the Federal Conferenceof the So-

make exceptional efforts in using work time in order to use available

presentlylosing about2 billion dollarsof its net accumulationper year.This meansthat

the CentralCommittee of the League of Communistsof Serbia, to which this report

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