Vladimir Gligorov

Yugoslavia and Development:
Benefits and Costs

 

 

 

 

 

Introduction

 

The creation of Yugoslavia was not motivated by economic or even social development, but its establishment was rather to serve the usual reasons of the state - above all security, but also equity. The latter, understood as the fulfillment of national – in the sense of ethnic – rights and objectives, was also the basis for its legitimacy. However, no durable agreement was ever reached on the constitutional framework of its national and Yugoslav legitimacy. In the pursuit of an equitable solution to its national issues, the country was in a state of perpetual crisis of legitimacy. This unfulfilled nationalism blocked its democratization and resulted in the adoption of misguided decisions, among others also in the domain of economic policy.

Both the economic and political history of Yugoslavia consists of a series of ill-advised constitutional decisions and then intermittent attempts to implement necessary reforms so as to rectify these decisions. These decisions would regularly go on to prove themselves as untenable since they were guided by the same, mainly ethnic or national motives. Some form of dictatorship was always seen as justified, above all from the perspective of security. And then one form or other of territorial devolution was used to seek out equity for national-territorial and economic interests.

At the same time, the external circumstances were not favorable. The country needed (i) a liberal-democratic constitution in an era of rising nationalism; (ii) the development of a private-ownership-based economy open for exchange with the world in a time of growing protectionism and totalitarianism and (iii) the rule of law in revolutionary times. Favorable conditions for liberalization and democratization occurred only on the eve of the country’s dissolution.

During the last couple of decades after the break-up, seven ex-Yugoslav states co-exist within a system of regional cooperation that suffers from the same shortcomings as the former common state. Thus the current situation seems as temporary and unnatural as any of the Yugoslav structures from the inception of the common state to its disappearance.

Even though the common state was conceived as a project in modernization, both national and social, the overall consequence of the Yugoslav political and economic explorations, which regularly brought about short-lived and misguided solutions, was backwardness, and not only economic at that. This failure should not be taken as proof against the project itself since neither before nor after the existence of Yugoslavia have political instability and a general lagging behind been removed. But history is not suitable for counterfactual evaluation, except when speculating about the future. In real time, let’s say towards the end of the 1980s, the project of a democratic Yugoslavia was not inferior to its nationalist alternatives measured by what could be expected from those alternatives. But nationalisms prevailed, and this is now history, which needs to be explained. That the fall was so steep represents a challenge to that explanation. But that is a matter of political choice and not historical inevitability.

This text will deal with a historical overview of Yugoslavia’s economic development and economic policy, with attention focusing on the period after 1948. First, I’ll set out the theoretical framework then I’ll show the most significant institutional and developmental characteristics, then outline above all the fiscal dilemmas of the joint state and finally, sketch out the economic development after the dissolution, that is, during the last few decades. Separately, in short asides, I’ll focus on the financial crisis, the collapse of economic reforms from the 1960s, the stagnation of the 1980s, the unequal development of the new states, and the creation of a common market in 2006.

Politics between Nationalism and Liberalism

Political history is not completely positivistic since it is based at least on the tacit assumption that there are certain durable regularities, if not full-scale historical laws. These regularities exist for two reasons. One is the perpetual problems faced by those who make political decisions. On the one hand, there is the need to secure a certain level of public goods, above all security, and on the other, there are changing circumstances, which require adjustability in carrying out political objectives. The other reason is that constitutional or other government solutions constrain the available set of means which can be used to resolve durable political problems in changing external and internal circumstances. This primarily concerns the constitutional framework that is the basis for legitimacy, regardless of the fact how much support one government or another, one holder of office or another actually has.

On the other hand, economic history is at least partially autonomous in relation to political decisions and, in fact, is part of the changing circumstances that have to be taken into account in decision-making since both objectives and especially available means are subject to change. This is due to both the development of technology and changes in the significance and character of external economic relations. Foreign trade and public finances are undoubtedly of great significance for small countries and small economies. Yugoslavia was certainly a small country, at least from the economic perspective. Even more so are the post-Yugoslav countries that emerged after the break-up of the common state.

Bearing in mind the political circumstances and the economic development of the 20th century, Yugoslavia represented a political solution from the standpoint of the basic political problem, the problem of security as a public good. The problem it perpetually faced, however, lay in the discrepancy between the nationalist conception of politics and the economic need for liberal relations both internally and externally. Consequently, the state could not secure the desired level of equity and justice and was confronted with social discontent regarding the level and distribution of wealth.

On the one hand, the country was supposed to reconcile the nationalist conception of equity with the liberal demands of economic development. The latter, in turn, spurred social discontent. The country fell apart when nationalism became the political expression of social dissatisfaction. At the same time, the liberal-democratic alternative was rejected. After the break-up, the sluggish and indecisive democratization and liberalization were the cause of a relatively unsatisfactory political and economic development, partly also due to misguided economic policy.

Therefore, the discord between nationalist objectives and liberal means is, simply put, the reason behind the perpetual instability of the Yugoslav state and the practically constant adoption of misguided, or at best, short-sighted political solutions.

A General Overview of Development

The data on Yugoslavia’s development is not unknown and therefore it is unnecessary to go into detail. Image 1 shows the GDP per capita in steady dollars. From 1921 to the outbreak of World War II, the country was not characterized by any exceptional economic progress. In that, however, it was no different from the majority of neighboring countries, whether it be, for example, Greece, Hungary or Bulgaria. Partly this was the consequence of demographic growth, but since we are talking about several decades, it is clear that on the whole the economy was stagnant and that it is not possible to talk about any significant progress in relation to economic development on Yugoslav territory in the time before the establishment of the common state.

 

 

Image 1: Yugoslavia, GDP per capita, steady dollar

 

 

Source: Maddison database

 

Development in the years after World War II, if we put aside the years of the Soviet blockade, is characterized by significant economic growth and development, if the latter is expressed, again, by the per capita GDP. While in the first twenty years or so the GDP per capita increased just under 40 percent, in the period from 1952 to 1979 it increased just under 5 times. As in both cases it was a matter of rebuilding the country after great war devastation, there is no doubt that Yugoslavia after World War II achieved an incomparably better economic development than it did after World War I. Of course, one has to bear in mind that economic development the world over was much faster, and not only compared to the development in the period between the two great wars, but was in fact much faster than in any previous period in history – at least to the degree that such comparisons are at all possible.

This can also be seen by comparison with neighboring countries, all of which had successful economic growth in the period after World War II, before the end of 1970 and in the decade that followed. Irrespective of statistical problems, due to which comparisons are not always fruitful, there is no doubt that, for example, Greece, Hungary and Bulgaria, not to mention the more developed countries of Western Europe, also had accelerated economic growth and development.

In fact, the 1980s are the key here. Namely, in that period all socialist countries, including Yugoslavia, underwent economic stagnation and decelerated growth. This can also be seen in Table 1. In the period from 1979 to 1989 there is actually zero growth of per capita income. A similar situation prevailed in neighbouring Bulgaria and Hungary, but, for example, not in Greece. And if to this group we add Austria, it becomes completely clear that this stagnation was not a consequence of European, much less world, economic trends. In order to understand the break-up of Yugoslavia, this is certainly the most important political and economic period.

This is followed by the 1990s, which, up to 1993-1994, brought a reduction of economic activity by about roughly a half, even though it was about a third smaller than in the years 1979, 1989 and 1999. Recovery begins again after 2000 – and for all ex-Yugoslav countries together it is such that on the whole the levels from 1979 and 1989 are reached again. Nevertheless, one has to bear in mind the demographic changes, which are now negative, for a part of the population was lost due to the wars, due to a negative birthrate, and due to emigration. All the same, when the GDP per capita is in question, for about thirty years, for all ex-Yugoslav states taken together, it barely marked an increase. In other words, the country or countries had stagnated for practically three decades.

Finally, economic development ground to a halt or was significantly slowed down – if not completely negative – after 2008, as a consequence of the global financial crisis. Some ex-Yugoslav states fared better than others – which in itself neccessitates an explanation. In this context, the role of the liberalization of trade both with the European Union, as well as regionally by the establishment of a regional free trade zone known as CEFTA (Central European Free Trade Agreement), was of great significance. The European Union had opened its market to those ex-Yugoslav countries that had not joined the EU like Slovenia in 2001. CEFTA, in turn, had inherited bilateral free trade agreements when it was established in 2006. In any case, one cannot stress enough the importance of foreign trade for these very small ex-Yugoslav economies.

In the century between the establishment of Yugoslavia and the present, development was either slow or unsustainable. In the entire period, however, there was no political stability either in Yugoslavia, or between the newly independent states, and not even within them internally. And this irrespective of the great, in reality revolutionary, changes and independently of the different constitutional reforms and political changes, including changes in economic policy. The common country, as well as the independent states, did not aspire towards democratization, while liberalization measures were often confronted by suspicion about who was better and who worse off. Non-democratic solutions and the non-liberal economic policy temporarily contributed to stabilization, but in the long run they signified the abandonment of a more durable political community. The consequence of this discord between nationalist interests and liberal means of economic development is the long-term lagging behind of the Yugoslav countries.

There is no simple explanation for this stagnation. Geographically, Yugoslavia is in the immediate vicinity of the developed world, so this backwardness, if one can call it such, could not be explained by geographic isolation from the advanced part of the world. Moreover, at least at the time of stagnation during the 1980s, external circumstances in fact favored the political changes that were necessary in order for the country to join the developed part of the world. So that the lack of development and lagging behind, especially during the last forty years, can only be explained by the decisions made by the Yugoslav authorities, the authorities of the Yugoslav republics and autonomous provinces, and the authorities of the newly independent states – and not in the last resort by the citizens.

Regional Differences

Bearing in mind the permanent instability of the country, it is not unimportant to see whether dissatisfaction was based on the enduring bias of the political and economic system towards one or another region. Again, the data for development after World War II is better and more easily compared than the data for the period between the two great wars. Also, it can be analyzed more or less in detail. Still, a rough picture of comparative development can be gained on the basis of differences in per capita income.

 

 

Table 1
Per capita national product in 1910, US dollar (1970 value)

 

 

Source: Palairet, The Balkan Economy. CUP, 1997. pp. 233.

 

For the period before the establishment of Yugoslavia there are varying assessments of differences in development and one of these is given in Table 1. The data for Slovenia and Macedonia is missing, but the differences in development could not have been too great because even the differences in relation to Austria and the Czech Republic are not as great as they would be later. In any case, regional differences, which were to dominate the (economic and political) debates in both Yugoslavias, do not appear to be such as to represent an insurmountable obstacle to creating a common state.

For the period between the two wars the quality of the data leaves something to be desired. This was due, among other things, to frequent changes in internal regions. Probably the most influential was the claim by Rudolf Bićanić that more developed regions, which had been a part of Austria-Hungary before the unification (of Yugoslavia), were paying higher agrarian land tax rates than Serbia, Montenegro and Dalmatia. Table 2 provides a cumulative review for the period before the Great Economic Depression.

 

 

Table 2
Land tax, 1919-1928

 

 

Source: Bicanic

 

Differences in tax burdens wouldbe the subject of political disputes throughout the entire history of Yugoslavia as the common country. An additional subject of disagreement was the expenditure of public funds in which it was usually claimed that greater investments are being poured into less developed areas – that is, into Serbia between the two wars – and fewer into the more developed. As agriculture was the dominant economic activity in the first Yugoslavia, data on different agrarian land tax burdens is undoubtedly significant. It is important to note that with time the budget was less dependent on indirect taxes – which included agrarian land tax – and that these made up about 50 percent of the budget immediately after the establishment of the common state, falling to about a third of overall tax revenue before World War II, while the share in the budget from immediate taxes and revenues from state enterprises went up. Before the war the overall sum of the latter was just below from what it was from indirect taxes.

The main objection during that period, however, was that the tax burden of the more developed areas had increased in the transition from Austria-Hungary to the Yugoslav state. This undoubtedly continued to be a hot topic later as well when tax burdens in Yugoslavia were compared to the ones in the newly independent states. It must be said that it is not unexpected that a new state should invest more in its underdeveloped areas because it is reasonable to expect that regional differences should decrease after state unification. After all, this is the key economic rationale in establishing any common state. Therefore, this was to become the second most important topic of debate – could Yugoslavia secure the kind of economic growth that would lead to an evening-out of the level of economic growth in all of its regions, could it lead to a convergence in the per capita income levels?

The data is not reliable in the case of the first Yugoslavia, but since the overall growth was modest, it would not be realistic to expect that a particularly significant increase of regional differences had taken place. Besides, if and to the degree that it happened, the effects of negative international economic trends would in all likelihood have to be greater than any domestic redistribution of funds. This, of course, doesn’t change the substance of the problem of equity, both as regards the less developed as well as the more developed regions because all expectations are that, in the long run, the state would secure a convergence of the levels of per capita income between the regions. To put it another way, it would be reasonable to expect that less developed areas have faster economic growth than more developed areas in order to even out the levels of the standard of living throughout the country.

It is not very likely that this occurred in the first Yugoslavia, but the interesting question here is whether the second Yugoslavia secured faster economic growth for the less developed republics and provinces? This is the subject of enormous amounts of research, but the rough and very general answer is not particularly contentious. In other words, there was no obvious convergence in economic development between the particular regions. This can be seen from Table 3.

 

 

Table 3:
Gross Domestic Product per capita (Slovenia = 100, unless otherwise indicated)

 

 

Notes: 1) Data for 1997. refer to gross material product per capita for all Yugoslav republics (including Kosovo) and gross domestic product for other countries. – 2) The actual GDP per capita (in USD according to the exchange rate) for Slovenia and the hypothetically achievable level of GDP per capita (in USD according to the exchange rate) for other republics, assuming that the differences in the region (measured according to the GDP per capita) are the same as in 1989.

 

Source: The Vienna Institute for International Economic Studies
for 1997 and 1999 and the OECD for other years.

 

Slovenia’s GDP per capita equals 100. As can be seen from the table, the Croatian per capita GDP was about two thirds of Slovenia’s, the Serbian about half, the autonomous province of Vojvodina’s about 60 percent, while the other republics and provinces trailed behind with roughly a third of Slovenia’s per capita GDP. Kosovo lagged behind mainly because of its high birth rate – but its overall (economic) growth rate was even a little higher than in other parts of the country. The less developed regions underwent slower progress in the first period after 1952, which, at least in part, was due to isolation from external markets after the introduction of the so-called Iron Curtain. It is also important to note that there were no further negative consequences as regards their development, especially if one takes into account the demographic changes, after the changes in the economic system in the mid-1960s.

Generally speaking, one could not say that Yugoslavia had managed to secure convergent development for different parts of the country. In fact, particularly after the systemic changes in the mid-1960s, it seems that regional development, in better and worse times, was fairly balanced. Regional differences were not small – with the exception of Kosovo, up to a ratio of 1 to 3 – but such differences are not unheard of in many complex countries. However, the fact that over time they did not change significantly, and particularly that they were not significantly reduced, points to systemic deficiencies and also challenges the economic rationale of the political, especially the nationalist, disputes - the latter particularly if one takes into account the difference in employment and unemployment. Table 4 gives the rates of unemployment from 1952 to just before the break-up.

 

 

Table 4: Unemployment rate in %

 

 

Source: OECD.

 

It is clear from the above that the less developed areas were, partly due to higher demographic activity, much worse off in terms of the labor market than the developed areas. In truth, the high unemployment rate that was especially prominent in the 1980s has remained a structural economic characteristic for the majority of the new independent states to this day. The causes are surely not the same, at least not entirely. It is important to point to the durability of low employment and high unemployment even in Croatia after it became independent, but it is particularly important to do so in the other regions and states. Slovenia is an exception here – and this is of notable significance in explaining the dissolution of the common country – because Slovenia was a leader among the secessionists, at least from around 1988. This casts doubt on the explanation for the country’s break-up, which states that it is to be found in Yugoslavia’s economic failure and the failure of its economic system, which was biased in favor of the underdeveloped regions and against the more developed ones.

 

 

Image 2: National income per capita

 

 

Source: Maddison database

 

After the break-up of the country, there was a great increase in regional differences, that is, in differences pertaining to the economic activity of the states that emerged from Yugoslavia. Table 3 also gives the state of affairs at the end of the 1990s, when these differences, due to the consequences of the wars, were the greatest. In the meantime there came about a relative convergence, which can partly be discerned from Image 2, but nevertheless today's differences are greater than in any period of Yugoslav history and if one is to believe the data from admittedly not very reliable sources, regional differences were also smaller before the establishment of the common state in 1918.

All in all, Yugoslavia was not a country with convergent economic development, but neither was it particularly biased, negatively or positively, towards the less developed areas, at least if we are to judge by the growth of the per capita income. The overall development, expressed as per capita income, can be seen pretty clearly in Image 2. The differences between the republics did not change significantly (Kosovo is the exception due to its demographic growth), and then increased in relation to Slovenia and later in relation to Croatia as well, while the others converged, especially with Serbia.

Concerning employment and social development, the less developed areas were on the whole lagging behind. A more detailed analysis would certainly show that development in different segments and particular fields was not unequivocal, especially where education and the development of industrial production are concerned, but this would not be of crucial importance in explaining stability and the sustainability of the economy and the state.

Reform and Deadlock

Most attention has probably been focused on studying the self-management system and the economic reforms of the mid-1960s. The motivation was as much political as it was economic. Finances from abroad also played an important role, as did bilateral aid and multilateral credits and finally access to the foreign financial market. The political limitation was maintenance of the one-party monopoly of power.

Generally speaking, socialist reforms followed the strategy – first economic, and then political reform - in other words, first liberalization of the market, and then democratization. The program of the League of Communists of Yugoslavia from 1958 contains a clear ranking of alternative systems. A multi-party democracy was more acceptable than the Soviet system if socialist self-management and non-party pluralism proved to be unsustainable, in the sense that they are neither economically nor politically more progressive than alternative systems. One could, therefore, say that democratization was seen as the political exit strategy if it turned out that there was no other way to maintain political stability and economic development.

One problem was the nationalization of investments. A key systemic difference between capitalism and socialism was – and as a matter of fact, still is – who initiates investment decisions? The nationalization of assets was the precondition for the state to monopolize investment decisions. Investments were financed from the profits of companies that were in state ownership on the basis of a central plan. This is the very essence of the Soviet system which was established by Stalin’s collectivization and nationalization of the 1930s. In the beginning, self-management was seen as a transfer of the management role to the economic collectives, that is, companies. The reforms of the sixties brought about a change in ownership relations, state property became social property and thus the central, state-owned investment fund was abolished. With it went the system of central planning, too. The power to decide on investments was conferred, at least nominally, on the companies which themselves – albeit in the name of society – were owned by the workers employed in them. Finally, and probably most importantly, normal trade and financial relations with the world were established, mediated by commercial banks. This, in turn, necessitated conducting the usual monetary and fiscal policy.

The final motivation, however, was that the next reform and future economic and political adaptations would lead to privatization and democratization. And truly, with certain constitutional solutions and changes to the electoral system from the beginning of the sixties, it seemed as if things were starting to move in that direction. To this one should add the opening up of borders and an increase in international cooperation. All these systemic changes had a temporary character and the next changes were to involve privatization and democratization. At least, this is how things looked in the mid-sixties.

The reforms turned out to be a political failure. Their continuation was abandoned, while political changes took a completely different, if not unexpected, course. Privatization was stopped by the student protests of 1968, while democratization was halted by nationalist movements that threatened to bring about the break-up of the country, also occurring in 1968. The result was that the majority of economic changes were kept, although later certain elements of the economic system were modified so as to harmonize with the political changes. The latter, on the other hand, went mainly in the direction of strengthening the republics and provinces at the expense of the federation. Of key importance here were the changes to the banking system and the system of public finances. In a sense, nationalization (by the republics and provinces – trans.) of assets and taxpayers came about.

The research, both foreign and domestic, most frequently focused on the wrong issues. Foreign economic research, which was extensive, focused with special intensity on the performance of self-management companies and their drawbacks that were to be expected if one started out from the assumptions of economic theory. On the other hand, domestic studies were devoted to the country’s downgrading mostly from the legal or constitutional aspects, as well as to the shortcomings of a decentralized socialist system in which it was not possible to control wages or investments from a center, since the federation lacked above all the fiscal, but also political instruments necessary.

Of crucial importance, however, was the relinquishing of further democratization, which came about in order to preserve stability – and was achieved by a return to authoritarianism and by a redistribution of national competencies. A debate similar to the one conducted in the first Yugoslavia, above all after the territorial reorganization of 1939, was renewed. This turnabout also determined the political disputes and their solutions which ultimately led to the break-up of the country.

How did a system created to stop economic reforms function? During the 1970s, monetary policy was mainly used to make sure that the economy did business with a negative real interest rate. This was a key macroeconomic fact. As the federal government had very limited powers in the domain of fiscal policy, monetary policy was the most important instrument of overall economic policy. Details are not of paramount importance; it is sufficient to point out that interest rates were lower than the rate of inflation in conditions of what was practically a fixed rate of exchange. As a consequence, this led to an increase of investment and spending, financed by foreign loans and a growth in imports. As money was cheap globally in the seventies, this kind of economic policy was not at odds with what was going on, not only in the developed countries of the world, but in some socialist countries as well. Yugoslavia probably fared better than most because its foreign debt was to a large degree funneled into investments, while in other socialist countries, for example the Soviet Union, it was directed towards spending (on wheat imports, for example). Nevertheless, a great disparity in the trade balance developed, while foreign debt accumulated. All the way up to the economic crash of the eighties.

The economic system created in the mid-sixties was supposed to increase the efficiency of investments and spur competitiveness on foreign markets. The sum of reform measures undertaken then were not that different from those undertaken by countries at the time of abandoning socialism at the end of the eighties and beginning of the nineties. The regime of the foreign exchange rate was balanced out, central banks were empowered to deal with inflation, while the fiscal system was meant to secure the sustainability of public finances. Finally, commercial banks were established that took deposits in hard currency and gradually became capable of taking out foreign loans and financing the investments of domestic companies. Direct foreign investments were not possible, and neither were private domestic investments - shortcomings that were intended to be eliminated at a later date. The system thus established was capable of recycling foreign assets, as well as of monetary subsidies to the economy – which in fact it did do once further reforms were relinquished. So the system that was established to increase the efficiency of the economy was ultimately used to sustain self-management companies, national budgets and buying stability by increasing spending.

The seventies were the time when this system produced favorable results. Much research sees this period – and the short period of Ante Markovic’s government in 1990 – as the golden age of Yugoslavia. The dinar was strong, imported goods were accessible, investments raised the economy’s capacities, and in the infrastructure was partially renewed or enlarged. Remittances from abroad also made a certain contribution since in the sixties a great number of workers had emigrated to Germany and other countries that enjoyed faster growth than there was available work force. Thus a macroeconomic system was established that in certain elements persisted mainly in Serbia up until the crisis of 2008-2009.

Foreign Trade

Judging by the data of the Yugoslav National Bank, the balance of trade in the first Yugoslavia was on the whole equalized. The economy was pretty closed, measured by the ratio of imports to exports and domestic production. It was a matter of some ten percent, that is, around twenty if overall foreign exchange was taken into account. In part this was a consequence of the economic trends immediately after World War I, when inflation was a problem throughout Europe, and then came the Great Depression when foreign trade was reduced everywhere. In later years, the state attempted to utilize protection measures, which curtailed imports, but also exports since there would occasionally be a ban on exporting agricultural goods, which was the most important export commodity.

In the second Yugoslavia, financing from abroad played a significant role and thus imports were on the whole greater than exports. Still, the trade deficit began to be significant only after the economic reforms of the sixties, and became particularly so after the political stabilization at the beginning of the seventies. Apart from the policies of the exchange rate (relatively stable) and of prices (accelerated inflation), a significant role was played by increasing remittances from abroad. Also, in the second half of the seventies especially, loans taken abroad also played a significant role. By the end of the seventies, exports covered imports by about 50 percent. The balance of services was positive due to transit revenues, as well as growing tourism, so that, if remittances from workers abroad are taken into account, the current account of the balance of payments showed a lesser deficit. This characteristic will endure in the majority of the newly- independent states, at least until the crisis of 2008-2009.

 

 

Table 5
Trade flows in the Socialist Federal Republic of Yugoslavia1

 

 

Placement on the local market, in % GDP

 

 

 

Placement in other regions, in % GDP

 

 

 

Export, in % GDP

 

 

Note: - 1) Includes end products and intermediates.

 

Source: OECD.

 

Table 5 contains data on domestic and foreign trade. As can be seen, the domestic market was certainly much more important than the foreign market, a characteristic which will again persist even after the break-up of the country, albeit not in Slovenia, while things begin to change under the influence of the crisis of the eighties. The role of this crisis is also visible in Table 5.

 

 

Table 6
Trade in Southeast Europe (1980-1985)

 

 

Notes: 1) West Germany. – 2) SEE-1 (Southeast Europe - 1) Includes Bulgaria, Hungary, Romania, and Yugoslavia. – 3) SEE-2 (Southeast Europe - 2) Includes SEE-1 with Greece and Turkey.

 

Source: The Vienna Institute forIinternational Economic Studies

 

Right after the outbreak of the crisis at the beginning of the eighties, exports show a significant growth in relation to GDP. Moreover, this whole decade will show a much more equalized trade balance than the previous decade. The overall picture becomes even better if we add the export of services, which became very significant with the development of tourism. Generally speaking, if overall foreign exchange is taken into account, Yugoslavia in the period after the economic reforms (of the 1960s) was trade-wise a significantly more open country than the majority of the successor states after the break-up, but before the crisis of 2008-2009.

 

 

Table 7
Trade in Southeast Europe (1990.)

 

 

Notes: 1) Including West and East Germany. – 2) SEE-1 (Southeast Europe - 1) Includes Bulgaria, Hungary, Romania, and Yugoslavia. – 3) SEE-2 (Southeast Europe - 2) Includes SEE-1 with Greece and Turkey.

 

Source: The Vienna Institute for International Economic Studies

 

It is also interesting to note the change in trade partners during the crisis of the 1980s. Tables 6 and 7 contain some comparative data. The second half of the eighties sees a significant increase of exports to Germany and Italy, which will go on to become the most significant trade partners of the newly-emerged independent states as well. Imports from these two countries were already significant earlier. In any case, Yugoslavia had an increasingly open economy in the period after the economic reforms of the sixties.

The Lost Decade

The eighties were of key significance not only for Yugoslavia, but for the European socialist world as a whole. If we look at Images 1 and 2 it is clear that this was a decade in which the economy stagnated. From Tables 3 and 4 it can be seen that certain republics fared better than others, especially where employment was concerned. But in terms of economic growth there is practically little difference between the regions. The case was similar with other socialist countries, even though the reasons were different. In some, like Yugoslavia, the problem was high foreign debt, while in others it was the drop in prices of oil and other raw materials.

Yugoslavia practically went bankrupt in 1981-1982 because it was unable to pay back its foreign debt. The reason for this was that monetary policy had changed in the United States and there was a sudden jump in interest rates. Given that at the time the foreign trade deficit of Yugoslavia was really huge, the further financing of imports through foreign loans was not sustainable and thus it was necessary to rebalance imports and exports. Furthermore, it was necessary to secure the refinancing of already existing loans at much higher, and from the position of the country’s trade capabilities, unsustainable interest rates. A reduction of the foreign trade deficit required a significant correction to the dinar exchange rate, while financing of debt called for finding new sources of revenue. The country, however, could not adapt quickly enough and actually never managed to fully adapt all the way up to its very break- up. Why?

The reason was of a systemic nature. Here it is necessary to bear in mind three key characteristics.

The first was the dispute over the dinar exchange rate. Devaluation would redistribute expenditures among the republics. The issue of hard currency earnings from tourism was particularly sensitive. The export sector, especially tourism, would certainly gain from devaluation, while sellers on the domestic market would be worse off. There was no mechanism of compensation, mainly because the fiscal system had changed significantly in the meantime so that the federal budget no longer had the necessary means to compensate those who fared worse from revenue achieved by taxing those who fared better. The central bank used the hard currency rate of exchange and selective lines of credit to compensate, but this only increased the disputes because the terms were inequitable in a matter that should have been equitable. In fact, in this way the central bank incurred obligations that could then easily be turned into losses and thus into fiscal expenditure for the republics and provinces.

The second characteristic was the expectation that credit would be worth less when it became payable because a negative interest rate would be ascribed to it. In conditions of loss of value of the exchange rate, it would have been necessary for inflation not to compensate corrections to the nominal exchange rate. This would have, however, required a significant change in the behavior of companies, which, in turn, did not show a willingness to sacrifice implicit subvention through accelerated inflation. And so the entire decade was marked by losses in the exchange rate and a parallel acceleration of inflation. The correction of the trade deficit was more a consequence of the inability to finance it and less a result of exchange rate and monetary policies.

The third characteristic is probably the most important. As a consequence of social and national resistance to economic reforms, one was precluded from selling property as a means to finance foreign debt. At the beginning of the crisis in 1981-1982, foreign debt made up less than a third of the overall Yugoslav product. Interest rate obligations were not small, but they in no way exceeded several percentage points of the domestic product. It would have been relatively easy to turn the debt into foreign investment if companies had been allowed to issue shares so as to secure the necessary financing. This was not feasible because of the ownership system which precluded the sale of property, especially to foreigners, but also to private individuals in general, and because it could also lead to the spilling-over of obligations and profits across the borders of republics and provinces, which was politically very hard to swallow. It was not until 1988 that agreement was reached with the International Monetary Fund about solidarity in sharing responsibility for the foreign debt of the country.

These obstacles to a relatively quick solution to the problem of foreign debt made it very difficult to start up economic production in improved macroeconomic conditions, which ultimately resulted in the economy stagnating for a whole decade with the constant acceleration of inflation and growth of the unemployment rate. Only at the end of 1989 the government of Ante Marković embarked on changing these systemic characteristics, which in the short term led to improved economic trends in 1990, but also to a renewed economic crisis at the end of that year and finally to the break-up of the country in 1991.

During that entire decade, the advocates of liberal economic solutions and democratic political legitimacy could not garner public support for the necessary changes while, at the same time, the influence of the nationalists grew until they finally prevailed in Serbia, after which the break-up of the country was inevitable. The more developed republics repeatedly highlighted the inequity of the fiscal system, which was the alleged cause of the overspill of their assets to less developed regions, while in Serbia the interest in new territorial delimitation along ethnic lines prevailed. While fiscal problems were solvable, territorial delineation along ethnic lines naturally signified the end of the common state.

Breakdown and Setback

Practically from the very inception of the common state, the distribution of gains and expenditures between its constituent parts was the key topic of debate and dispute. The constitutional framework was never accepted by certain national (ethnic) communities and in certain places local control of the territory was disputed. In the economic domain, the fiscal system was deemed inequitable by practically all sides. In the end, the country broke apart over the dispute of who was paying how much into the common coffer. This, of course, was just the rationalization. However, this dispute was to be expected given that the diminishment of fiscal powers by the federal government had been a key demand from 1968 up to the break- up itself. There was thus first a fiscal devolution, which was thoroughgoing and practically complete, and then the Fund for the Underdeveloped, which was practically the only remaining fiscal instrument for the reallocation of assets, became the focus of disputes, and then finally even the central bank, which intervened with selective credits thus causing different regional consequences, became a contentious issue.

What was the specific problem with the Central Bank and the banking system as a whole? In the period of adaptation to the crisis of foreign debt during the eighties, the financial picture changed in such a way that the developed republics had a trade surplus in exchange with the less developed republics and the province of Kosovo. In other words, the country had divided itself into creditor and debtor republics. The financial significance of Slovenia grew markedly. In part this was a consequence of the Fund for the Underdeveloped, even though it was precisely the more developed republics, above all Croatia and Slovenia, which sought its abolishment. However, to the degree that money really moved from, let’s say, Slovenia to Macedonia, goods followed the money, too. So the republics that had paid more money into the Fund for the Underdeveloped and then left it were also the republics who sold more of their goods to the less developed republics and the province of Kosovo. This was simply the domestic balance of payments: that domestic trade was financed by credits from the more developed republics, turning them into creditor republics, while the lesser developed regions became the debtors. Because of this financial asymmetry, measures that would in one way or another assist the financial recovery of the debtors were not acceptable to the creditor republics. But if the balance of power at the level of the federal government had changed, that could have become feasible.

In this context, the rise of nationalism in Serbia was of special concern. The motives of the Serbian nationalists were neither economic nor predominantly financial (apart from personal interest, of course). Instead, they sought a change in the balance of power at the federal level with the objective of revising the existing constitution and making possible territorial corrections. And truly, the Serbian nationalist movement was a combination of anti-liberal social demands from 1968 and nationalist territorial demands above all towards the provinces (Vojvodina and Kosovo – trans.), but implicitly also towards other regions (in other republics) populated by Serbs (so-called ‘Serbian lands’ – trans.). These political objectives brought about the break-up of the country. But the country never functioned well economically either, and the necessary reforms were not in harmony with any of the Yugoslav actors’ nationalist interests.

Costs of the Break Up

The nineties were economically bad for all the states that emerged out of Yugoslavia except for Slovenia. There was a disruption of trade ties, except for those within the rump Yugoslavia (Serbia and Montenegro – trans.), and between Bosnia-Herzegovina and neighboring Serbia and Croatia, but the scope of that exchange was significantly less than before the break-up and the wars. Table 3 shows the difference of the real per capita income in relation to the income that would have been achieved had long-term relations with the Slovenian economy been maintained. So that during the nineties all other emerging Yugoslav countries started lagging significantly behind Slovenia, but also behind other European countries. From Image 2 it can be seen that in practically all the newly-emerged Yugoslav states the level of the per capita income at the beginning of the second decade of the 21st century was on a par with the level achieved during the seventies or eighties (given that the eighties were marked by stagnation). In other words., the countries in question had lost about three decades of development. If we take into account that the bigger countries – Croatia, Serbia, Bosnia-Herzegovina – did not achieve visible growth in the period from 2008 until today, then we can even talk about four decades of stagnation. Only Slovenia had positive growth, even though by certain indicators, today it too is further away from the European developed countries than it was at the end of the seventies or the end of the eighties.

All in all, it is difficult to talk about the economic benefits of leaving Yugoslavia. Furthermore, if one is to compare tax burdens, especially bearing in mind the gains of such tax expenditures, and putting aside defense spending, which in the second Yugoslavia was considerable and today is much reduced, it is difficult to claim that the newly-emerged states are less of a burden to the taxpayers and the economy. It neither runs counter to logic nor simple fact that smaller states pose a greater burden on taxpayers (with the exception of micro-states, but only Montenegro qualifies as such), simply for reasons of the economy of scope.

Finally, in terms of democratization and liberalization, the newly-independent states, with the exception of Slovenia, are more restricted than Yugoslavia, or at least this has only started to change very recently. Democratization is incomplete and a few of the newly-emerged states are going through a constitutional limbo. Slovenia and Croatia have become European Union members, a fact that has a stabilizing effect on the economy and on political relations, but the rest of the former Yugoslavia has not achieved a more durable stabilization of the democratic system of decision-making.

Regional Cooperation

After the war in Bosnia-Herzegovina and particularly after the war in Kosovo, the international community, especially the United States and the European Union, formulated a policy of regional cooperation with the idea that increased economic cooperation would bring about political stabilization and normalization. The European Union has invested substantial effort in mobilizing interest in regional cooperation principally among the former Yugoslav states. Probably the most important such regional project is the regional free trade zone known as CEFTA. It was established in 2006 after existing bilateral agreements on free trade developed into a regional agreement. The European Union additionally supported this project by first removing customs barriers on imports from the Yugoslav countries, and then concluding with them Agreements on Stabilization and Association which would ultimately lead to European Union membership. With CEFTA and free trade with the European Union, liberalization finally prevailed in the newly-emerged Yugoslav states.

What is the possible contribution of liberalization to economic development? This is particularly interesting because the crisis that took hold of the Yugoslav states from 2008 up to the present has a lot in common with the crisis from the beginning of the eighties. In the same way, the period that preceded the crisis has much in common with the period from the seventies. Thus these two distinct crisis periods and their consequences are comparable.

Development after 2000, which represents a kind of new beginning for the entire region since both (Croatian strongman) Franjo Tudjman and (Serbian strongman) Slobodan Milošević exited the political stage, has the same characteristics of uneven progress as the period of the seventies. Trade deficits increase, foreign debt becomes greater, and unemployment has not been reduced to an acceptable level.. The last is noteworthy among other things because many explanations for the growth of unemployment in Yugoslavia after the economic reforms (of the sixties) can be understood differently today.

Back then explanations saw the growth of unemployment as caused by institutional factors, especially by the system of self-management. Namely, employees as owners have an interest in increasing investments and not increasing the number of employed because that way they increase their own income, which apart from their salary also partakes in the company profits.. This should explain the growth of capital in relation to labor and the limited mobility of the labor force. Nevertheless, when one looks at development in the majority of European post-socialist or transition countries, one notices that the tendency for economic growth to be based on growth in productivity and not growth in employment, is present everywhere. This makes sense if the development in question is financed by foreign assets, as was to a large degree the case in Yugoslavia after the economic reforms because investments will be turned into the most productive technology, due to which, again, employment will grow at a slower rate, particularly if it is a question of those employed in the state sector being pre-qualified for work in the new industries or the services sector. So that in transition economies, and such at the outset was the Yugoslav economy after economic reforms, productivity takes precedence over employment. This to a large degree also occurred in the emerging Yugoslav states in the first decade of the 21st century. Growth was mainly based on productivity, while employment even showed a tendency to shrink.

Therefore the problem lay not in unemployment, but rather in the economic sectors in which investments were directed. During the seventies, Yugoslavia invested in industry, but not an insignificant part of the foreign debt went into spending. Additionally, efficiency was a problem due to negative interest rate subsidies. By contrast, most emerging Yugoslav states, except for Croatia and Montenegro, made use of the post-2000 period of low interest rates mainly to invest in non-export services. As a result, by and large foreign debt was directed into the production of non-exchangeable goods and into spending. Ultimately, all the former Yugoslav countries faced the financial crisis of 2008 with high foreign debt. Just as at beginning of the eighties, the refinancing of these debts was made difficult, not so much by the higher cost of loans, but by the need for foreign creditors to put their own finances into order. And so the entire region found itself in a similar situation to the one from the 1980s, with the difference that there was now little leftover property, the sale of which would help cover the debts. Thus it was necessary to correct the exchange rate where it was overvalued, or cut spending, by reducing employment if there was no other way, leading to a leveling-out of the current balance of payments with greater exports and reduced imports. This is a process that has been underway for almost a decade in the new Yugoslav states, which, time-wise, is similar to the eighties.

Here it is important only to see what the role of a more liberal trade framework is in relation to the one from the 1980s. The existence of a regional free trade zone was certainly helpful, for it preserved the level of trade inherited from the period prior to 2008. However, access to the market of the European Union had significantly more impact. In the period from 2008 to 2016, all the new Yugoslav countries increased their exports from 30 to 60 percent, with imports stagnating at a level close to that of 2008. The advantage of liberalization today in relation to resistance against it during the eighties certainly influenced adaptability to the crisis. Even though the key problems - foreign trade deficits and foreign debt - are the same.

However, it is worth pointing out that, irrespective of the above, the European Union is increasingly unpopular, that nationalism is on the rise, and that regional cooperation has occurred in spite of, and not as a consequence of, the policies of the new Yugoslav states.

Conclusion

Yugoslavia did not succeed in achieving liberalization and democratization, but it was not an obstacle to them either since the newly-emerging states after its dissolution have not displayed a durable affinity for liberal measures or sustainable democracy, nor, for that matter, for regional cooperation either. However, circumstances have changed and so far nationalist and authoritarian forces have not prevailed as they did when they dissolved the joint state. The economic cost of non-liberal and nationalist politics is permanent backwardness due to their unsustainability in conditions of modern development.

 

 

 

 

 

 

 

 

Literature

 

Bicanic, R, Ekonomska podloga hrvatskog pitanja (The Economic Basis of the Croatian National Issue). Zagreb, 2004 (first edition 1933).

Gligorov, V, Why Do Countries Break Up? The Case of Yugoslavia. Uppsala, 1994.

Gligorov, V, „Elusive Development in the Balkans: Research Findings“, wiiw Policy Notes and Reports 2016 (wiiw - Wiener Institut für Internationale Wirtschaftsvergleiche; Vienna Institute for International Economic Studies).

Lampe, J. R, Yugoslavia as History. Cambridge University Press, 1996.

Palairet, M, Balkan Economies c. 1980-1914: Evolution without Development. Cambridge University Press, 1997.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

l a t e s t   . . .

. . .   l a t e s t

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With the assistance of the Federal Ministry of
Foreign Affairs of the FR of Germany

 

 

 

 

 

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