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LJUBO SIRC, Two Decades of Economic Planning in Yugoslavia - Ralph Raico, New Individualist Review 
New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981).
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Two Decades of Economic Planning in Yugoslavia
DURING THE SECOND World War, the Yugoslav Communists were so certain of being in possession of the absolute truth that they did not hesitate to jockey for power from the very beginning of the struggle against the occupying German and Italian armies. Thus in Slovenia, they issued a decree, at the end of 1941, to the effect that anybody fighting the enemy outside the Communist dominated Liberation Front would be considered a traitor and liquidated. Many a non-Communist resistant was driven into collaboration by the resulting pressure.
Simultaneously the Communists, whose number was twelve thousand at the beginning of hostilities, persistently denied any intention of introducing “social changes” after the war and kept promising free elections and everything that goes with them. Yugoslavia being a country of small landowners, the main field for recruitment of the partisan detachments was the peasantry, which made it expedient for the Communists to underline the advantages individual peasants would obtain should the Communist rule be established. They promised the peasants more land, although nobody knew where more land was to come from, as the entire arable area was under cultivation and the share of big estates was negligible. The Communist flirtation with the peasants led some foreign observers into believing that they were agrarian revolutionaries.
In order to obtain Allied recognition, Tito, who had emerged as the leader of the National Liberation movement, concluded an agreement with the exiled Yugoslav government in London after repeated interventions by the leading Allied personalities on both sides. This agreement guaranteed all sorts of democratic liberties for the population, politicians, and the democratic parties. Yet when the war was over, Yugoslavia found itself firmly under the control of the Liberation Army, officered mainly by Communists, and of the political police, an exclusively Communist domain. The letter of the agreement with the London Government may have been sometimes abided by, but the spirit certainly never was.
During 1945 and 1946 hardly any reforms were introduced; the time was spent on tracking down “collaborators” and bringing them to justice, but the definition of “collaboration” was so wide that practically anybody, patriot or no patriot, whom the Communists did not like could be fitted in. If somebody could not, there was always the possibility of trumped up charges.
In addition, many people were killed without any trial at all. Although the Nazi rule in Yugoslavia was extremely ruthless, the Germans are quite right in pointing out that a large part of the over 1.5 million Yugoslav war victims were due to internal strife; and a substantial number of these were liquidated by the Communists, sometimes for good reason, sometimes only in preparation for the final take-over. The massacre continued after the war when some 300,000 people were done away with; the prisons overflowed and many people, mainly members of the German minority in Yugoslavia, were driven over the border to Austria. There was sufficient horror around to terrorize the population into silent submission.
A person must be utterly convinced of the correctness of his cause to take upon himself this destruction of human life and this infliction of suffering to establish himself firmly in the saddle. Even if one accepts the possibility of such firm conviction—and many Communists must have been convinced that they were up to something remarkable—there is still something pathological about it.
In the eyes of the Yugoslav Communists, Stalin was the depository of all wisdom and knowledge of how to abolish all evils and human failings. They had some difficulties with him, but this was because the Yugoslavs were too zealous to tolerate Stalin’s cautiousness. His aim was to make the Western Allies believe that he had turned into a Russian nationalist, and then to take them by surprise when they least expected it. Stalin was afraid that the Yugoslavs would spoil his game by their zeal and even advised them to pose as monarchists.
The obvious thing for the Yugoslav admirers of Stalin to do was to take a leaf out of the Soviet book, which they did. In the spring of 1947, they produced a Five Year Plan which was closely modeled on the Soviet plan, although the two countries could hardly be more different than they are. The Soviet Union possesses a vast territory and has a population at least ten times larger than Yugoslavia. The traditional economic freedom of peasants in Yugoslavia goes partly back to the Austrian Emperor Joseph II in the second half of the eighteenth century, and in other parts to the liberation from the Turks, while in Russia the feudal relations lingered almost into the twentieth century. The individual character of Yugoslav agriculture was further strengthened by a land reform after the first World War.
In spite of these substantial differences between the two countries, the Yugoslav Communists applied the Soviet methods of economic development, possibly pushing them to the extreme, so that the French Professor Marczewski went on record as remarking on the planned rate of growth of the Yugoslav national income:
In fact, in the long term the average rate of growth proposed for the national income seems impossible to achieve. Until now the highest rates of growth in the economic history of the world have never surpassed 8 per cent. . . . It is impossible to explain these figures except by the complete lack of experience of the Yugoslav planners who appear to have copied Soviet rates without understanding what they really meant.1
THE SYSTEM TAKEN over from the Soviets tended to rigidity and uniformity because it did not know any of the economic and accounting calculations which help the enterpreneur at least approximately adjust to circumstances and thus contribute to the maximization of welfare. Yugoslav planning was based on a few very simple tenets.
The central principle was, naturally, the abolition of private property, from which according to Marx every evil stems. His reason for this is the theory of surplus value, the part of the product allotted to capital owners. Following the labor theory of value, all charges for the use of producer goods were disregarded except for a purely nominal interest rate on short-term bank credits.
The only criterion used for the allocation of capital and other resources was the teaching of Marxist dialectical materialism that the means of production determine productive relations, which means the social system. Their conclusion was that the most modern equipment should be used, because this would help the introduction of “socialism” as a stage on the way to full “communism.” The choice of technique was not adapted to circumstances, and, as in the Soviet Union, it was thought and planned that manufacturing had to prevail over other branches of the economy, particularly agriculture; within manufacturing industry by far the greatest stress had to be on the production of producer goods and power; and within this framework the leading link was machine building. Even the disparaged market indicators were harnessed in the interest of this policy. The fixed prices of raw materials and capital goods were kept very low, and the prices of consumer goods very high. Yet since no distortion of prices could make possible a shift in the direction of the economy exactly as desired by the Communists, the market forces were considered as “anarchy” fed by “spontaneity,” and soon completely disregarded and replaced by planning—the “conscious direction of extended reproduction.” At the same time, the fact that people value present things more than future things, that food today is more important than a television set ten years hence, was neglected, which led to the adoption of a practically unlimited planning horizon, to the idea that even the most important present needs can be sacrificed to the “luminous future.”
The collective satisfaction of needs was considered much preferable to individual consumption, so that most “distribution” tended to be organized by the state. Distribution, however, was considered “non-productive” anyway and neglected, so that often even available goods did not reach the public.
Before this system copied from the Soviet Union could get underway, Stalin found that Tito had become too big for his shoes and decided to cut him down to size. In a way, the Yugoslav Communists were more Stalinist than Stalin and several times tried to jump the gun, act in advance of the time table carefully worked out by Stalin to take the West by surprise and gain full control of Eastern Europe. Stalin thought that this would not do and was in addition jealous of Tito, who succeeded in making a name for himself in Yugoslavia and in the world, so he did not entirely depend on Stalin’s reflected glory. Soon there was a complete rift with which ideology had very little if anything to do.
One of the proofs for this explanation is that the first reaction of the Yugoslavs was an attempt to prove that they were good Communists. They clamped down on their bourgeoisie and dragged more people to prison and administrative forced labor camps. A fully fledged collectivization campaign was started and agriculture utterly disrupted. When it proved that it was impossible to fulfill the Five Year Plan of 1947, the priorities provided for in this Plan were brought into play, carrying further the initial lopsidedness. Inessential investment, i.e., investment in consumer goods production was dropped, and the concentration on heavy industry stepped up. To make things worse, even depreciation was not used for the replacement of worn-out equipment, but was channelled into new industries, so that many branches, especially agriculture, textiles, and housing, suffered from disinvestment. In other words, the branches most essential for supplying the population with necessities were run down in order to provide means for the completion of the Giants of the Five Year Plan. Table I shows the intended and the actual structure of “productive” investment.
Thus many more resources were concentrated on manufacturing industry in the period 1950-56 than originally planned, although the first Five Year Plan was underfulfilled in all other respects. In fact, it had to be extended for another year, to 1952, and from then economic activity was carried on until the end of 1956 on the basis of provisional one-year plans—due to the fact that the entire basis of planning began to be questioned. Nevertheless, the belief that the concentration on “key projects” would solve all problems persisted in spite of all the other changes described below. From 1947 until 1956, the investment in “basic” industries (iron and nonferrous metallurgy, machine tools, ship-building, electrical appliances, and construction materials) amounted to 51.2 per cent of industrial investment and reached its peak in 1952 with 57.3 per cent. To this 31 per cent invested in power production has to be added.
A change came about only in 1957, when the second Five Year Plan was introduced with the aim of “eliminating the disproportions [shortages and bottlenecks] arising from the policy of industrialization and forced expansion of heavy industry.”2 In this period the concentration of investment in industry was reduced to just over 40 per cent, of which only 31 per cent went into “basic” branches.
WHEN THE YUGOSLAV Communists finally admitted in 1950 that Stalin was directly involved here, and not some obscure Soviet officials who misinformed Stalin about the real state of affairs in Yugoslavia, they also embarked on the first deviation from the Soviet orthodoxy. They abandoned—at least in theory—the principle of “odinanachalie,” of the absolute control by the government appointed factory manager, and introduced workers’ councils.
Yet they also began to realize that the running of factories according to physical targets, laid down in detail by the centralized plan, led to a much worse confusion and anarchy than had ever been seen under the working of spontaneous market forces. The search started for simplified indicators which would make the functioning of the factories coherent and would also give some scope for the workers’ administration. Marxism, however, proved a tremendous stumbling block in this respect. The wish was to introduce some kind of “automatism,” or invisible hand, by which well managed factories would be rewarded and badly managed works punished. It became obvious that it did matter how much capital was used by an enterprise and that therefore there had to be some kind of charge on the use of capital; but this could not be the interest rate, because it was deemed to be un-Marxist.
Ten years later, the same problem arose in the Soviet Union, when Liberman’s proposals to introduce a profit rate were aired. From many quarters they were assailed and it was claimed3 that in a Marxist country there could be no serious consideration of using a percentage charge on capital—profit rate—but that a percentage charge on wages fund—a “surplus” rate—was the only possible solution. Such a surplus rate was introduced in Yugoslavia in 1952 under the name of “the rate of accumulation.” This rate not surprisingly proved to be unworkable and was replaced after a year of confusion, in 1954, by the interest rate. Thus the first of the basic Marxist principles which should have brought Yugoslavia unprecedented prosperity went overboard, under the impact of the requirements of economic efficiency. Of course, the interest rate did not and still does not work properly in Yugoslavia, but the need for a scarcity charge on capital was at least recognized.
The introduction of the “automatism” also called for commodity prices based on supply and demand, but those in charge still believed that manipulated prices could influence actual economic relations in desired directions, and therefore decided to keep the prices of raw materials and agricultural goods down. In fact the agricultural prices were so low that they depressed the real earnings of peasants from sales of their produce in 1952 on average to 42 per cent of their pre-war earnings. On top of this, there came very high direct taxes.
The passive resistance of the peasants, however, forced the Communists to stop their campaign for agricultural collectivization by direct and indirect pressure, initiated in 1948, and to allow them to pull out of government-sponsored cooperatives, which they almost all did. For a few years the peasants were left alone, which led to a considerable improvement in agricultural production as compared with the disastrous year 1952, when agricultural production was lower by about one-third than in the late 1930’s.
After the introduction of interest rates, the intention was to allocate the capital to those offering the highest return at capital auctions, but this soon proved unacceptable. The expected return on capital invested in heavy industries was so low that investment into these branches would remain well under that desired by the government. Therefore, auctions between industries were abandoned and limited to auctions within the same branch, while the allocation between branches was according to the provisional yearly plans, and later to the Five Year 1957-61 Plan which however provided, as mentioned, for a much more sensible distribution between consumer goods and producer goods and thus led to a considerable increase in consumption from the very low level of 1952, when consumption, total and per capita, might have been down by as much as one-third of the pre-war consumption. In fact, during this relaxation in 1957-58, total consumption probably caught up with what it was before the war.
But while consumption improved, the key projects worked at low capacities, which made the Communists think that there must be something wrong even with the very halfhearted application of market indicators. Since they could no longer make up their minds to scrap the market altogether, they found the ingenious solution that the market was all right for day to day decisions, but “the fundamental economic development could not be spontaneous, but had to be based on the conscious social process of reproduction by planned direction.” And the third Five Year Plan of 1961-65 was designed for “further accelerated economic expansion on the basis of a more balanced growth.”
As a result fixed investment in basic industries, which was reduced to 13 per cent of “productive investment” in 1958 from 37 per cent in 1952, went up again to 29 per cent in 1961-62. Total fixed industrial investment jumped from 42 in 1959 to 52 in 1961 at the expense of agricultural investment, down from 21 per cent in 1959 to 15 per cent in 1961, and investment in transport, down from 24 per cent in 1959 (28 in 1957) to 16 per cent in 1962 (17 in 1963).
THIS REVERSAL TO Marxist-Leninist investment policy resulted in the economic crises of 1962 and 1965, marked by stepped up production of unsaleable goods, increase in foreign debt, and inflation. One is entitled to wonder how it was possible to revert to the old pattern of investment in spite of the fact that market forces had made themselves increasingly felt since 1952. The answer is that investment allocation remained concentrated in the hands of various federal and other investment funds (in 1964, 68 per cent of total fixed investment) which obeyed Plans and political criteria instead of economic indicators, and that the rest was mainly re-investment. In addition, old habits were at work—anything metallic was still considered to bring prestige—and the interest rates were still pegged too low, particularly in view of the inflation, to force investors to be selective and choose the most efficient projects.
The result of these attempts in the 1960’s for achieving accelerated growth by renewed concentration on equipment production led to more increases in inventories (see Table 2) and to the establishment of more capacities never to be used.
The figures on inventory increases in Table 2 are from the OECD report on Yugoslavia in 1965, with the exception of the figures for 1964 and 1965 which come from official Yugoslav abstracts which in 1964 admitted, for the first time, a substantial “difference” defined as “a result of opposite fluctuations [including changes in prices, customs duties, inventories, period delimitations, statistical coverage, etc.].” Clearly, “inventories” tucked away amongst other items account for the predominant part of this “difference.” There are no corresponding figures for new capacities established but never used, but it is allowable to estimate that in the years of higher growth of industrial production about one-third of this production will never satisfy any human needs at all. (In 1965 “increases in stocks” was finally introduced as a separate item in the national income accounts.)
Such wasteful factories would have to go out of business if their inventory keeping were not financed by a constant flow of bank credit. This credit cannot be repaid, of course, because the inventories are never sold, which all leads to inflation (taking the form of considerable increases in money supply if not always of rising prices, since these are largely controlled and were completely frozen in the spring of 1965). From 1956 to 1964, the volume of production (including waste) rose 2.2 times and the money supply 4.7 times, from 553 billion to 2,577 billion dinars, to which another 1344 billion dinars have to be added, although the enterprises, public bodies, and individuals holding them are restricted in their use. As a consequence, the purchasing power of the dinar in terms of living costs was reduced to 3.8 per cent of its pre-war purchasing power, although the normal pre-war circulation of banknotes (6 billion dinars) was restored in 1945.
The OECD report of 1965 advocated an incomes policy for Yugoslavia because the OECD experts believed they had traced the origin of Yugoslav inflation primarily to incomes and not to the financing of increasing stocks of unusable products. Yet, in spite of more freedom for profit distribution, if any is made, within the enterprise it is hard to believe that the Communist League had so lost its grip over the workers administration that they could not stop any unwarranted increase in incomes. On the other hand, there would often be no money to distribute, were the banks not prepared to finance increasing stocks of inventories. The OECD also stressed that there was no deficit budgeting on current account; but deficit budgeting on capital account is no better, especially in Yugoslavia where investment frequently produces no fruit at all.
As a result of this strange kind of economic development, Yugoslavia kept sucking in large quantities of foreign resources, which had to tide her over bottlenecks in the heavy industries, production of primary goods, and food production. From 1952 to 1962 it had been receiving American aid to the tune of about $100 million a year. Besides, it contracted foreign debts amounting to $800 to $1000 million by 1962 and to $1400 million by 1965. For obvious reasons this could not continue forever. For this reason, the dinar was devalued from 50 to 300 dinars to the dollar in 1952, to 750 in 1962, and to 1250 in 1965. Because of various duties and subsidies and of tying imports to exports, these moves in the exchange rate do not influence foreign trade directly; but they are a reflection of the dinar’s loss of purchasing power.
Another lapse back from the more liberal policies of the mid-1950’s was an attempt to win the fight against private peasants by starving them of any investment, which began to be concentrated on the 15 per cent of the agricultural area owned by “social estates.” The only result here was that the law of diminishing returns set in, and the products of the “estates” cost twice as much as the products of private peasants. Furthermore, the “estates” worked at losses in spite of various bonuses paid to them.
THE CRISIS INTO which the Yugoslav economy ran in 1962 and again in 1965 posed once more the classic question of the proper economic role of planning and the market. The crisis of 1962 was so clearly engineered by the Plan providing for high investment in “basic” industries that President Tito called for “better planning.” There was even talk about scrapping the Plan altogether, which did not happen, but the confidence in the Plan fell so much that it was no longer considered a particularly useful guide for anybody.
Waterston described the equivocal situation in 1962:
. . . the federal plan no longer lays down production quotas for enterprises. This does not mean, however, contend the planners that the federal plan has become only a hypothesis of the future development of the economy, for the overall targets of the economy as shown in the federal plan, are still legally binding. Nevertheless, the practical significance of this position is hard to understand, since no person or enterprise is held legally accountable for fulfilling any target of the federal plans.4
The reforms as envisaged after the 1962 crisis were not carried through because the Communists shrank back from laying large portions of industry idle and relaxing more controls. The result was another crisis in 1965, which shook the planning even further.
The European Economic Commission Report on Planning published in 1965 says—obviously on the basis of a Yugoslav official submission—that, in Yugoslavia, the enterprises enjoy:
complete independence of action [and that they] use plans as indications of expected changes in demand . . . in so far as they prove to be correct forecasts of the market situation—though they can follow their own market research if they consider that to be more accurate.”5
This is apparently the end of all claims that plans possess extraordinary virtues. It is intended now to drop annual plans altogether and to decentralize investment in the hands of enterprises. A new mid-term plan is being worked out, but there are already voices which warn against “planning burdened with high growth rates.”6 In 1962 an official spokesman thought that it was better “doing less but doing it better.”
One of the goals the Communists set out to accomplish was the equalization of the economic development of various Yugoslav regions, which were and continue to be very differently developed. Slovenia has almost three times the national income per capita of Macedonia, Bosnia, or Montenegro (see Table 3).
The equalization should have been brought about by considerable transfers of accumulated capital from some regions to others. Table 4 is an indication of what was happening.
The table shows that in spite of the substantial shifts of capital from more developed regions to less developed, there was hardly any change in the shares of various regions in the social product. This is understandable, since production does not depend only—or even foremostly—on the availability of capital. Substantial parts of the national income of Slovenia and of the more developed parts of Croatia and Serbia were withdrawn and allotted to less developed Southeastern regions. There was hardly any proportionate economic progress in the subsidized regions, however, which increased the resentment in the parts of the country which had to supply the subsidies. There is talk now of reducing the transfers to only 2 or 3 per cent of the national income.7
Such large-scale transfers of resources are possible only under a regime which controls—through various budgets and funds—about one half of the national income. Under normal circumstances there would be transfers from region to region—although much smaller—in the form of private investment which would remain the property of people from the transfering region and would be more properly managed.
The yearly rate of growth of the total Yugoslav national income from 1947 to 1962 was 6.6 per cent, and of the national income per capita 5.4 per cent. This is less than in the cases of Greece, Italy, and Western Germany, but the picture becomes worse if it is taken into account that in these countries personal consumption rose in step with the national income, while in Yugoslavia it was badly lagging behind. Before the war, in Yugoslavia at least 75 per cent of the national income was consumed; after the war the personal consumption (including social insurance benefits) fell to 50 per cent of the national income: from 1947 to 1962 total output increased by 132 per cent over the pre-war level, but consumption by only about 66 per cent. This gives a compound annual rate of the growth in total consumption of 3.4 per cent and of the consumption per capita of 2.2 per cent.
This is particularly bad in view of the enormous efforts: Investment regularly amounted to about 30 per cent of the national income. However, the capital-output ratio was very bad for a country at the Yugoslav stage of development, amounting to 6.5/1 for the period 1948-1964. In 1948-1952 it was 10/1, then it fell to 3/1 in the comparatively relaxed period from 1956-1960, but again climbed to 8/1 in the subsequent period up to 1964, when a new Marxist-Leninist investment drive was started. The Communists themselves admit this to be very bad and discuss the possibility of a capital-output ratio of 2.5/1 in the future.
The welfare of the Yugoslav population was sacrificed to investment and to government expenditure which very often did not contribute to welfare at all, but was used for public ostentation. The investment was in branches of industry for which the Yugoslav market is too small, for which there are not enough raw materials and other cooperating factors, and which produce at cost far above the world market price.8 Thus many of the new industries work at low capacities (e.g., machine tools at below 60 per cent) although they turn out unsaleable goods (according to the Vice-Chairman of the central government, Gligorov, the value of inventories in 1967 was about 80 per cent of the national income, while 20 to 30 per cent is more consistent with experience in market economies. It cannot even be hoped that these new branches will contribute to the welfare of the population later on. They are obsolete and badly organized.
WHAT WAS WRONG? The Communist economic ideology, as explained at the beginning of this article, led the Yugoslav government to embark on large-scale investment in branches of industry for which there was not sufficient management talent or technical skill. The Yugoslav technicians managed to produce complicated machinery, but not at a cost comparable with costs in other countries.
The production of some kinds of machines was pushed at full speed, while other machines needed in conjunction with them or raw materials and intermediate products were disregarded because they were technically less glamorous. Large numbers of unskilled workers were available, but the investment was not adapted to them. When streamlining began, numerous workers had to be dismissed. About 10 per cent of the industrial labor force was unemployed, and about as many had to leave to work abroad. This latter development was particularly grave for Communists who had always represented migration as a consequence of capitalist incompetence.
The most advanced and capital-intensive techniques were used, while there was a shortage of capital and highly skilled labor and unskilled labor was available in abundance. Thus the equipment produced is even today so expensive that it is often cheaper to do things by hand, not to speak of the cheapness of imported equipment.
There is such a discrepancy between supply and demand, particularly of producer goods, that the economy can only run at tolerable utilization of capacity if large-scale investment continues to be carried through, to the obvious danger of more capacity being created which it will be difficult to utilize. This circular investment has been indulged in until now; but at present the futility of this practice seems to be fully realized, because it has become clear that the capital structure of productive capacity is completely divorced from both the derived demand for producer goods and the final demand for consumer goods. Very large quantities of resources are used, but this results in very little welfare.
In many ways it is much easier to start from scratch than to put right a structure completely distorted by investment which bears no relation to actual demand. To make matters worse, the system has for such a long time favored passive obedience that it is now very difficult to change the attitudes of the population and prod people into being resourceful and prepared to take responsibility. The will of the Yugoslav population to work and to show initiative was also shattered by the fact that personal incomes and personal consumption were exceedingly low when compared with the efforts which were demanded from them, particularly when the resulting public and investment funds seemed clearly to be largely wasted.
The Communist government has come to realize this and now says that increased personal incomes and personal consumption are a sine qua non for further increases in production; but this is very difficult to achieve when the economy is as distorted as all Communist economies are. When Malenkov tried to step up consumer goods production in the Soviet Union in 1954, this proved impossible because of the lack of raw materials and appropriate machinery.9 There, as in Yugoslavia, the development of heavy industry proved to bear no relation to the actual needs of the country and to be largely “l’art pour l’art.”
THE YUGOSLAV REFORM in 1965 should have remedied this situation by substantially cutting down on investment and by sharply reducing government expenditure. This was easier said than done, because it meant a further reduction in the already low utilization of heavy industry capacities, the laying idle of many prestige works, and the dismissal of large numbers of workers. These workers should in fact have been made available for the production of badly needed consumer goods, but who was to organize their production and where were the equipment and raw materials to come from? The planners had not kept in mind in the previous decades that machine tool manufacture has ultimately to provide specific machines for specific purposes and not just large numbers of machines. When the Yugoslav government decreed that henceforward investment would have to be “profitable” and not “political” it meant precisely that it had to result in equipment needed for the production of consumer goods which are in demand and should not merely swell production by whatever it happened to turn out.
Even if the Yugoslav heavy industry today produces the right type of equipment, it is still often not at the right price or of the right quality. This could be corrected by opening the borders and exposing Yugoslav producers to the competition of foreign products; but since the Yugoslav productivity in the prestige industries preferred by the Communist planners is so low that they had no hope of competing at the previous exchange rate, this was changed by 66 per cent to protect domestic producers from the same competition Yugoslavia invited. Since there was also a shortage of raw materials, it was decided to increase their prices to make their production more attractive and force enterprises to use them with greater care and economy. The agrarian prices were raised by 32 per cent, coal prices by 36 per cent, etc. This has led to major price adjustments: the cost of living rose by 30 to 50 per cent, according to region, and even by 70 per cent in some cities. All this has led to a new inflationary round, by which, it is considered, the devaluation of 1965 has been rendered useless.
This is not the main problem at the moment, however. While cuts in investment, reductions in government expenditure, opening of the borders, and readjustment of prices were certainly moves in the right direction, the question remains: Who is going to run the Yugoslav economy, who is going to be the moving spirit behind it? Up until now the Communists have relied on the central planners, but now it turns out that they are unable to coordinate and control the economy. The present answer seems to be decentralization of investment and current decision-making in the hands of workers’ councils. Is this going to work? For at least a decade, Yugoslav authors have been stressing that economic responsibility has to be reintroduced if the economy is to start working properly again. Lack of responsibility was one of the main criticisms against central planning. What is the likelihood that this criticism will be met by the new decentralized system?
It would seem that the link between a worker and his enterprise is insufficient to expect any responsibility. The worst that can happen to an irresponsible worker is that the factory might close down and the worker have to find a new post, where he would obtain the same guaranteed income as before. On the other hand, if the enterprise worked particularly well, workers would be paid higher wages out of profits. However, substantial disparities between wages of equally skilled workers were normally felt to be an injustice, so that in Yugoslavia constant attempts had to be made at “equalizing the business conditions,” that is eliminating the influences of market changes and technological choices on profit. What then becomes of enterpreneurial functions? Further, workers feel that they cannot be responsible for the original decision of founding an enterprise (which cannot be made by the workers’ council) that does not possess any potential for profitability, or for the current decisions which they cannot understand. There must be many of such latter decisions, because of those employed in the economy 7.1 per cent have no education at all and about 50 per cent have only four or fewer years of school.
In view of this still troubled situation, there are voices that it would be better to revert to “enlightened state-appointed management” than to rely entirely on workers’ councils. It is unlikely that this would take the country very far, because the men who are presently called managers are appointed on the basis of political instead of economic criteria, and their education is bad—25 per cent have only a primary school education.
It is hard to imagine how any progress can be achieved in the market economy without falling back on private initiative—enterprises directed by those who can make them work at a profit—at least in agriculture and small-scale industrial and artisan establishments. Something on these lines seems to be happening in Yugoslavia, although very slowly and tentatively. The larger enterprises can hardly be saved without large-scale technical, commercial, and financial cooperation from abroad.
In 1967, investment in fixed capital has been reduced and national income and industrial production have been stagnating. Stocks of finished goods keep increasing, but, because of a credit squeeze, they have to be financed from capital accumulations intended for new fixed investment. The impression is that, without solving the question of economic responsibility and initiative, necessary structural changes will not take place.
After twenty years, it has become abundantly clear that the economic principles introduced by the Yugoslav Communists in the late 1940’s did not lead to unprecedented growth but to utter confusion and waste. One is told that the advantages of “private ownership of the means of production” are being widely discussed in the Yugoslav Communist circles. This amazing development amounts to a complete reversal of the original Marxist teaching, in the name of which the Communists felt entitled to impose suffering on the population and suppress all liberties.
After a full circle has been thus concluded, disillusionment and disgust prevail in Yugoslavia among the youth, as exemplified in a letter addressed “To you, our fathers” and published in the students’ weekly of Ljubljana:
I believed in what we then called “our glorious past.” I believed in what we called “searching” or “the present” and what we called “our future” Today, I no longer believe in all this. I do not believe in the society which by force we want to call socialist. I do not demand answers to my questions, but I do demand the right to find them myself and to be allowed to stick to them. This is all.10
It turned out that freedom of thought and freedom of speech are not an impediment to economic progress, but rather a necessity if economic policy reminiscent more of black magic than of a rational approach is to be prevented.
[* ] Ljubo Sirc is Reader in Economics at the University of Glasgow, and a native of Yugoslavia. He is author of a study in economic planning for the Institute of Economic Affairs, London.
[1 ] J. Marczewski, Planification et Croissance economique des democraties populaires (Paris: Presses Universitaires, 1956), p. 134.
[2 ] Savka Dabcevic-Kucar, “Decentralized Socialist Planning: Yugoslavia,” in Hagen, ed., Planning Economic Development (Homewood, Ill.: Irwin, 1965).
[3 ] E.g., A. Bachurin and A. Pervukhin, “K voprosu o pribyli pri socialisme,” [“On the Question of Profits in Socialism”], Voprosy ekonomiki, September 1963.
[4 ] A Waterson, Planning in Yugoslavia (Baltimore: The Economic Development Institute, IBRD, 1962), p. 39.
[5 ] United Nations, Economic Commission for Europe, Economic Survey of Europe in 1962 (Geneva, 1962), part 2, Economic Planning in Europe.
[6 ]Ekonomski politika, March 5, 1966.
[7 ]The Times (London), June 14, 1966.
[8 ] See Karlo Buhman, “Industry in the New Economic Conditions,” Review of International Affairs (Belgrade), October 5, 1985.
[9 ] S. P. Pervushin, Production, Accumulation, Consumption (Moscow, 1965), p. 33. Quoted in the Neue Zürcher Zeitung, March 13, 1966.
[10 ]Studentska Tribuna (Ljubljana), March 9, 1966.