Yugoslavia - The Economy of The Social Republic Macedonia (Vol. 2 of 3) : The Main Report

CIRCULATING COPY Document of The World Bank -IQ BE RETURNED TO REPORTS DESK FOR OFFICIAL USE ONLY FIL F Cov j"j%pWTT%&'Wrr AT %' .Lj' LP;#.L 'q A ALri Report No. 1223-YU THE ECONOMY OF THE SOCIALIST REPUBLIC OF MACEDONIA YUGOSLAVIA (in three volumes) VOLUME II MAIN REPORT June 28, 1976 Europe, Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not ntherwise he dittel wi# #hm WAA nkA U hs-Lo. I CURRENCY EQUIVALENTS * Currency Unit Yugoslav Dinar (Din.) US$1 Din. 18.00 Din. 1 US$0.0555 Din. 1,000 US$55.55 Din. 1,000,000 US$55,555.55 * The Yugoslav Dinar has been floating since July 13, 1973. The clirrpnrv PuvA1pnts given above are as of Anril 30, 1976. FISCAL YEAR January 1 - Dec,mber 31 FOR OFFICIAL USE ONLY THE ECONOMY OF THE CONFIDENTIAL LSOTATTC,T rDPBTTIZTTC OF MArvTONIA YUGOSLAVIA Tab'le of Contlents L CL .L U .LLL LO Page No. A. THE SETTING ......................................TTI**** 1 1. Historical Overview ................................ 1 2. Natural Conditions ................................. 2 3. Political Institutional Framework .................. 3 B. SOCIO-ECONOMIC CONDITIONS ............................... 7 1. Population ......................................... 7 1.1 Overview ...................................... 7 1.2 Demographic Determinants ...................... 8 1.3 Prospects ..................................... 13 2. Labor Force and Absorbtion ......................... 15 2.1 Size and Determinants of Labor Force .......... 15 2.2 Under- and Unemployment ....................... 18 2.3 Prospects .................................... 20 3. Income Distribution ................................ 22 3.1 Income Distribution by Regions ................ 22 3.2 Income Distribution by Socio-Economic Sectors . 23 3.3 Income Distribution by Size Group ............. 26 3.4 Distribution by Communes ...................... 26 3.5 Summary Evaluation ............................ 28 C. THE MACEDONIAN ECONOMY .................................. 29 1. Macro-Economic Characteristics ..................... 29 1.1 A Comparative View to Macedonia's State of Development ................................... 29 1.2 Macedonia in the Economy of Yugoslavia ........ 37 1.3 The Characteristics of Macedonia's Growth ..... 42 1.4 Investment and Capital Efficiency ............. 48 2. Mobilization and Allocation of Financial Resources 55 2.1 Introduction .................................. 55 2.2 Budgets ....................................... 57 2.3 Resource Mobilization of Enterprises .......... 60 2.4 Banks ......................................... 63 2. 5qnariAl nPVPwnnment Fund ..................... 66 This document has a restricted distribution and may be used by recipients only in the prformance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Cont'd) Page No. 3. Planning and Plan Realization ...................... 70 3.1 The Planning Process .......................... 70 3.2 The Social Development Plan 1971-75 ........... 71 3.3 The Social Development Plan 1976-80 ........... 75 D. ECONOMIC AND SOCIO-ECONOMIC SECTORS ..................... 77 1. Agriculture ........................................ 77 1.1 Overview ..... 77 1.2 Physical Conditionsdit.*o.n.s. ... 77 1.3 Orientation of Land Use and'Production . ....... 78 1.4 Growth of Production .......................... 81 1.5 Inputs and Productivity ....................... 85 1.6 Marketing, Prices and Consumption ............. 88 1.7 Organization of the Agricultural Sector ....... 90 Social Sector ............................ 91 Individual Sector ........................ 93 Intersectoral Relations .................. 96 1.8 Issues for Future Development .....j............ 97 2. Forestry ........................................... 101 3. Industry ........................................... 103 3.1 Overview .................. ...... 103 3.2 The Development and the Characteristics of the Industrial Structure .......................... 103 3.3 Subsectors ... 108 3.3.1 Basic Industries108 Energy .............................. 108 Ferrous Metallurgy .................. 111 Non-ferrous Metallurgy .............. 112 Chemical Industry - Refinery ........ 113 3.3.2 Light Industries .................... 113 3.4 Tssue for Future Tndustrial Develonment ...- 116 V Tertiary Sector .. 120 4.1 The Role of the Tertiary Sector ............... 120 4z2' Construcion and Hsing-122 4.3 Transport-and Communications .................. 124 4.4 Handicraft .................................... 128 4.5 Tourin ....................................... 129 4.6 Education .... 130 4.7 Public Health and Health Icranc136 E. DEVELOPMENT ISSUES ...................................... 139 1. Strategy of Development ............................ 139 2. Mobilization of Resources ......................... 143 3. Allocation of Resources ............................ 145 THE ECONOMY OF THE SOCIALIST REPUBLIC OF MACEDONIA YUGOSLAVIA A.- THE SETTING 1. Historical Overview 1. Present Macedonia shares little but its name with ancient Macedonia, 1/ the nucleus of the Hellenistic world which extended at its historical zenith from Southern Italy to Egypt and Northern India. It rather dates back to the Early Middle Ages when the Slavic immigration into the Balkan Peninsula (during the 6th to 8th century A.D.) gradually superseded the ancient Greek/Hellenistic/Roman ethnic and cultural make-up. In 976 A.D., a group of Slavic tribes around Ohrid and Prespa, sharihg a distinct Slavic dialect, uprised and created a separate Macedonian Empire after centuries of Byzantine and Bulgarian overlordship. Although it lasted for less than half a century. it signifies the appearance of Macedonia as a histnr1i Ptty. After another two centuries of restored Byzantine hegemony, Macedonia was during the 13lth century gradailyv ircluifdpr intn the Serbian empire, then the dominant political power of the Balkan Peninsula. In 1371, the Ottoman (Trkish) empirea ealh ed-V permanent rule over haena f mre than half a millennium. 2. After numerous uprisings, Ottoman rule was eventually terminated by thle Irst Balkan VqaL ( 19 12), but the victors--Saerb-ia, Gec,andlugri- failed to reconcile their mutually exclusive historical promises to Macedonia and the expectations of the Macedonian people and to acknowledge any genuine Macedonian claim for independence or autonomy. After the Second Balkan War (1913) in which a coalition between Serbia, Greece and Montenegro defeated Bulgaria, the ethnically Macedonian area was divided between Serbia, Bulgaria, and Greece. During both the First and the Second World Wars, Bulgarian at- tempts to unify all ethnically-Macedonian areas within Bulgaria were defeated, and today's boundaries with small adjustments made after the First World War are essentially identical with those of 1913. The breakthrough to the estab- lishment of Macedonia as a political entity occurred on November 29, 1943, when the second meeting of the Antifascist Council of National Liberation of Yugoslavia (AVNOY) was held and decided upon the federal structure for post- war Yugoslavia. For the first time in its history one part of ancient Macedonia gained the status of a separate Socialist Republic, within the Socialist Federal Pepublic of Yugoslavia, and its Macedonian speaking in- habitants the status of a "nation". 3. Even before the medieval Macedonian empire was established, powerful cultural influences emanated from Macedonia. The Macedonian monks Kyrill and Method codified for the first time the Slavic language by translating liturgic texts from Greek into the local Slavic dialect using the cyrillic alphabet 1/ In this historical overview, "Macedonia" refers to the area of the Social- ist Republic of Macedonia (SRM) within the Socialist Federal Republic of Yugoslavia (SFRY) and the Macedonian-speaking parts of Northern Greece and Western Bulgaria. Throughout the rest of the report "Macedonia" is used synonymously with the Socialist Republic of Macedonia, SRM and "the Republic". - 2 - which they created for this purpose. Under their successors the city of Ohrid (in the southwest corner of Macedonia) became a cultural center from where the use of Slavic liturgy and Slavic writing spread over large parts of the Balkans and into Russia. 4. During the long Ottoman period, the Macedonian people preserved their lAngu and iil tirp it the I large help of the O-rthox i-hurch. It survived in symbiosis with the Turkish-Islamic superstructure, although in isolation from the cultural forces of Europe. In the 19th century, a secular literature started to appear written in Macedonian dialects. After the demise of Ottoman rule, the use of M.aced_oni an language con-tinued but under cond11-iions of inten sified efforts by Serbia from prewar Yugoslav kingdom, Bulgaria and Greece to the assi of the acedonian On. Tit U the second ming of AVNOY in 1943, when practically the existence of the Macedonian nation and the conditions for its devel-opment within the Socialist Federal Republic of Yugoslavia were sanctioned, the barriers against acceptance of Macedonian language were eliminated. After World War II, Macedonia finally-issued a dictionary of the Macedonian language and published the history of the Macedonian people in three volumes. 5. Until the end of World War II Macedonia remained a depressed, eco- nomically and socially stagnating and largely agriculturally oriented region locked into traditional technologies and patterns of living, and with few nuclei for development. 2. Natural Conditions 1/ 6. Macedonia is the most southern Republic of Yugoslavia. It is of al- most rectangular shape, extending some 200 kilometers in the east/west and 125 kilometers in the north/south dIrection with a total area of 23,713 square kilo- meters and a population of about 1.7 million. Macedonia is bordered in the east by the People's Republic of Bulgaria, in the south by the Republic of Greece, and in the west by the People's Republic of Albania. The northern border with the rest of the Yugoslav FederatIon is shared by the Autonomous Province Kosovo and the Republic of Serbia. 7. Macedonia is predominantly mountainous with many peaks rising over 2,000 meters. The mnrntai-n qa motlv hre rn-k nr karst cnvered with pastures or low (bush) forests; the categories of land use (with no or mar- gInal economIc potential) joIntly account for about three-quarters of the total surface. The plateaus and narrow river valleys between the mountain M-S 4 .,eS CO,,n ,, 4 ac _eM_in ..~ .a,,,4,-.n. r .o * r , 4 . .a . a nr0i- assives, aco .tn for the remainng quarter-of the surface, are mostly 1/ Compare the overview map and the special maps in the Annex which illustraL LIL charaCLeriSticS of the region in SUme more detail. Some spatial characteristics pertaining to agriculture are discussed in Chapter D1. used for intensive agriculture. About 80 percent of the total surface is drained by the Vardar River and its tributaries, which gravitates south and discharges into the Aegean Sea close to Saloniki, about 80 kilometers south of the border with Greece. 8. The valleys in Southern Macedonia, particularly the lower Vardar River, have a mediterranean climate, while climate conditions in northern Macedonia are predominantly continental with extreme seasonal fluctuations between hot and dry summers and cold and wet winters. Except for the western mountain ranges with high precipitation, the average annual rainfall in most of Macedonia comes to only 400-800 mm per year. Long drought periods during the summer are frequent. Their effect is aggravated by adverse micro-climate (absence of high and dense forests) and hydrological conditions (high seepage. quick run-off). 9. A major transport corridor--with the only major railway and road connections batwppn Ci-ntral Etirone and Yucaslavfa_ and Greapm and Turkev-- follows the Vardar Valley through the center of Macedonia. The capital --Skopje (population 313,000 in 1971)--is located at the itre io of tisf north/south artery with the minor northwest artery to Kosovo and the west/ southwest artery of the upper Vardar Valley. Much of the economic activity and population of Macedonia is concentrated within this spatial subsystem. A second di-stinct spatial' subsystem Is the Pelagonila Pla-In -in Sothes rl ~'ALU ".L~ L.LJL. ~F L-L~L ~ L i- L . L I J L I L .L L I 0 ul"hwesL Macedonia. It comprises about one-half of the total and much of the most productive arable land of the Republic, and most of the important food and tobacco processing industry of Macedonia is concentrated around Bitola (65,000 inhabitants) and Prilep (48,000 inhabitants), the second and third largest urban settlement of Macedonia. 3. Political/Institutional Framework 10. The basic soc4o-political premise of Macedonia's constitution is-- as for the Federation and for the other Republics and Autonomous Provinces of Yugoslavia--"self-management" with the maximum feasible degree of decen- tralization. Self-management is functionally assigned to the "basic organ- izations of associated labor", 1/ i.e., the fundamental organized units of 1/ Article 36 nf the 1974 Constitution provides that "Workers in a unit of a work organization which makes up a working whole in which the results of their Joint labo ca bepressed in terms of value within the work organization or on the market, and in which the workers can realize their soci.o-economi.c and othL-er -self-management rigts shl have1,17 thea viight and duty to organize such a unit of the work organization as a basic organization of associated labor." used for intensive agriculture. About 80 percent of the total surface is drained by the Vardar River and its tributaries, which gravitates south and discharges into the Aegean Sea close to Saloniki, about 80 kilometers south of the border with Greece. 8. The valleys in Southern Macedonia, particularly the lower Vardar River, have a mediterranean climate, while climate conditions in northern Macedonia are predominantly continental with extreme seasonal fluctuations between hot and dry summers and cold and wet winters. Except for the western mountain ranges with high precipitation, the average annual rainfall in most of Macedonia comes to only 400-800 mm per year. Long drought periods during the summer are frequent. Their effect is aggravated by adverse micro-climate (absence of high and dense forests) and hydrological conditions (high seepage. quick run-off). 9. A major transport corridor--with the only major railway and road connections batwppn Ci-ntral Etirone and Yucaslavfa_ and Greapm and Turkev-- follows the Vardar Valley through the center of Macedonia. The capital --Skopje (population 313,000 in 1971)--is located at the itre io of tisf north/south artery with the minor northwest artery to Kosovo and the west/ southwest artery of the upper Vardar Valley. Much of the economic activity and population of Macedonia is concentrated within this spatial subsystem. A second di-stinct spatial' subsystem Is the Pelagonila Pla-In -in Sothes rl ~'ALU ".L~ L.LJL. ~F L-L~L ~ L i- L . L I J L I L .L L I 0 ul"hwesL Macedonia. It comprises about one-half of the total and much of the most productive arable land of the Republic, and most of the important food and tobacco processing industry of Macedonia is concentrated around Bitola (65,000 inhabitants) and Prilep (48,000 inhabitants), the second and third largest urban settlement of Macedonia. 3. Political/Institutional Framework 10. The basic soc4o-political premise of Macedonia's constitution is-- as for the Federation and for the other Republics and Autonomous Provinces of Yugoslavia--"self-management" with the maximum feasible degree of decen- tralization. Self-management is functionally assigned to the "basic organ- izations of associated labor", 1/ i.e., the fundamental organized units of 1/ Article 36 nf the 1974 Constitution provides that "Workers in a unit of a work organization which makes up a working whole in which the results of their Joint labo ca bepressed in terms of value within the work organization or on the market, and in which the workers can realize their soci.o-economi.c and othL-er -self-management rigts shl have1,17 thea viight and duty to organize such a unit of the work organization as a basic organization of associated labor." - 5 - 13. The Chamber of Communes consists of 2 delegates each for every com- mune%.L e., a totaL o. 60) who are chosen from among the members bV Lit a- semblies of the communes for a term of four years. The second chamber parti- cipates in all decisions of the Assembly which are strongly interrelated with local interests. The Socio-Political Chamber consists of 60 delegates which represent, in separate delegations, the "socio-political organizations": (a) League of Communists, (b) Socialist Alliance, (c) Syndicates (trade unions) and (d) Youth Organization. The delegates are elected by all citizens in direct vote from a joint list of candidates. The third chamber is in con- trast to the first two chambers not associated with distinguishable areas of interest. Its major role is to provide initiative and guidance for future development of the socio-political system, and to resolve conflicts which could arise within or among the first two chambers. 14. The Assembly discharges its executive power through the Executive Council. Upon the proposal of the Presidency of the Republic, the Assembly elects the president of the Executive Council; he nominates the other members of the Executive Council (presently 22) who have to be voted upon by the Assembly. The Assembly, in addition, elects among the members of the Executive Council the secretaries (ministers) heading the administration organized func- tionally in secretariates (presently 16). Ten delegates of any chamber of the Assembly can request a vote of confidence of the respective chamber on the Executive Council. If the chamber does withdraw its confidence by majority vote, the whole Executive Council has to step down. 15. The "self-managed communities of interest" is a relatively new and imnortant inqHtiu-on nf Yiincnvin_ Thpv nnmnr4cp on a eommunal or the republic level, delegates or delegations of consumers (and providers of fi- nannci=l me=-as) !2nd supplines of specific se rice who decide joinly oth collection and the use of financial means. Communities of interest assume in certain areas the tr-aditional role of the state and are increasingly- e-- placing various specialized funds. They are obligatory in social services (lke education, health, social insurance, welfare), but they can also be instituted in other areas of general or broad interest, like housing, water supply, elcriiy irigtinanpsures. "the comntiso=itrs 'L Y, .LC%L.L.LLy, L11...L&.LU allU jJd.LZLLL AJIM tlJ[il1ULL.L1_' 01 ll1Lk_Lk_bL have a dual function: they set, and supervise the implementation of policies and in the case o social services communities of interest enter into an associate relationship with the Commune or Republic Assembly if legislation in the respective field is at discussion. 16. On economic matters the Chamber of Economy plays an important inter- mediary role both among the individual enterprises and between the enterprises and the Republic Assembly and the Executive Council. All enterprises are members of the Chamber and are represented by delegates in the assembly of the Chamber. In addition, each enterprise is a member of the council (of the Chamber) for the specific branch. The major functions of the Chamber of Economy are, first, to find solutions for common problems within a specific branch (on the level of the council) or between branches (on the level of the chamber as a whole); second, to convey the solutions to the Republic Assembly and Government, and third--if the view of the Chamber should be in conflict with the view of other socio-political entities, or if the Chamber did not succeed in consolidating the views of its members--work out compromise solu- tions through either the Executive Council or the Republic Assembly. The role of the Chamber of Economy in the process of Plan coordination and implementa- tion has also been reinforced by virtue of new legislation enacted in mid-1975. To avoid wasteful investments, duplication of facilities and shortfalls in financing and to insure that new investments are in accordance with priorities -established at the republican and national levels, the law presently requires prospective investors to: (a) register at the Republican Chamber of Economy all new projects (and at the Federal Chamber all projects whose total cost exceed Din; 30 million); and, (b) supply evidence on adequacy of financing arrangements. Because of these functions the Chamber of Economy carries the major responsibility for the preparatory work for the Five-Year Plan and the One-Year Program for economic activities and for assuring compliance in im- plementation. 17. The new law on planning codifying the principles of the new Con- stitution was promulgated on February 6, 1976. The contours of the role of the Republic Institute for Planning, however, were already emerging since 1974. The major functions of the Institute for Planning are first, the ini- tiation and/or preparation of preliminary studies; second. the organization and coordination of the planning process (the actual planning work, by con- trast, is within the constitutional concept of "se-management p largely left to the individual organizations and their associations and chambers)--within the Republic and betwqeen the Republic and the Federation, and third,--once the Plan is adopted--a periodic review of Plan implementation and report to the Republc Assembly. Conversely, withIn the system of self management planning" the Institute for Planning is essentially a clearing house for the large number of decIsion-makIng entities, without direct authority for stipulating objectives and targets, for deciding on conflicts between workIng organizations and their representatives, and for issuing orders or policies for implementation. -7- B. SOCIO-ECONOMIC CONDITIONS 1. Population 1.1 Overview 18. The demographic conditions differ widely among Yugoslavia's eight member republics and provinces. While some regions. like Croatia and Vojvodina, are concerned with the implications of slow population growth and the prospects of actual population decline, others--particularly Kosovo with a recent natural growth rate of 2.9 percent per year--are encountering many of the problems associated with rapid population growth. The situation in Macedonia resembles that in Bosnia-Herzegovina and Montenegro, half way be- tween the extremes. Table 1: POPULATION AND GROWTH RATES, BY REGION Growth Rate (per 1000) /1 Population 1971 Census Natural (1,000's) Share 1961-1971 1967-1971 Bosnia-Herzegovina 3,746 18.3 13.4 16.3 Kosovo 1,244 6.1 25.8 28.9 Macedonia 1,647 8.0 15.9 16.8 Montenegro 530 2.6 11.7 14.5 LDRs 7,167 35.0 15.9 17.0 Croatia 4,426 21.6 6.2 4.6 Serbia proper 5,250 25 . 6 8.2 6.1 Slovenia 1,727 8.4 8.5 6.4 Vojvodina 1 ,95 9.5 5.2 3.6 DRi3,5 6.0r 7. 5.3 LI LJ J,",.JJIJC' Yugoslavia 20,523 100 1. I. /1 "Census" growth rates: compound growth rates between census dates. "Natural" growth rates: average rates of natural increase (birth rate minus death rate). Source: Annex Tables 1 and 2. The divergent demographic pattern is strongly associated with the level of economic development. The more developed regions of Yugoslavia are charac- terized by very low levels of fertility and slow population growth, and the less developed regions by higher fertility and growth rates. - 8 - 19. Due to the above average growth rate, Macedonia's share in total population increased between 1953 and 1971 from 7.2 to 8 percent of the total Yugoslav population. In 1971, 69 percent of the population of the Republic classified itself as "Macedonian" by nationality: the second largest nation- ality is Albanian with a share of 17 percent, about 7 percent are classified as Turkish. Average population density in 1971 was 64 (as compared to the Yugoslav average of 80). However, population density between communes dif- fered widely 1/. In 4 out of 30 communes it was below 30; on the other hand, in 2 communes (Skopje and Tekovo, accounting-for 32 percent of the population) it exceeded 100 inhabitants. While the low-density communes share as common features mountaneous topography and a low percentage of arable land 2/, the high-density communes fall into two categories: (a) those with a high per- centage of arable land and (b) those of urban/industrial orientation. 3/ 20- The dynamics underlving the uneven intra-regional dispersion of population becomes evident from the view to recent changes of population. 4/ During the intercesSal period 1961-71- 7 of the 30 communes actually de- creased in population size and in only 5 communes did it increase at a higher rate than the Republic as a whole. These changes rnflrt hnth intra-rpniiubli migration and demographic forces. The growing communes either coincide with the industrial/urban centers of the Reb (Skopje alne increased by 44 percent and accounted in 1971 for almost one-quarter of the total), or have very high birth rates 5/ and are remote from any centers. On the other hand, many of the communes with comparatively high birth rates and low development 6/, Had stagnanting or declining population size due to outb-migation. - 1.2 Demographic Determinants 21. Fertility: The crude birth rate (the number of live births per 1,000 population) for Macedonia continuously dropped in the 1950's trom a peak of around 40 to 22.2 by 1973, still above the Yugoslav level (of 18.0). / Variations in the crude birth rate between communes, however, are large.-8/ Three communes still have crude birth rates as high as 30 and above, only 8 1/ See Annex Map 1. 2/ See Annex Map 8. C/ tUA - - M- - a 3 D ee Annex Map v8. 4/ See Annex Map 2. 5/ See Annex Map 3. 6/ See Annex Map 6. 7/ See Annex Table 2. 89/ See Arnpy Man 3. -9- communes have birth rates below the Yugosla, average, and the rates range from 33.3 to 9.8. It seems that high birth rates are in most instances-- Wit thk4- e notable exception of Sk1opje--affected by specific culturalfats . - A& V 4J.JL LJ "M iJ & A. L U.LU.J. O . and/or a low level of development. Significant declines in the crude birth rate, however, have bUeUe n achieved Ci nearl al cou , dJ- Lh differenc between communes are gradually decreasing. The decline in the crude birth rate was largely caused by declining fertility; it dropped continuously from 4.7 (live births per woman over the child bearing age) in the mid 1950's to around 2.9, it still considerably above the "stable population" level of about 2.1. The pattern of age-specific fertility rates does not essentially differ from conditions elsewhere in Yugoslavia. 2/ 22. Mortality (deaths per 1000 inhabitants) also declined drastically over the past twenty years from 14.8 in 1952 to 7.4 in 1973. 3/ This decline, as the similarly steep decline in the other less developed regions to levels below the Yugoslav average, is determined by two factors. First, improved health care and second, the age distribution of the population skewed in favor of the young age brackets which in turn is determined by the high prev- ious population growth. The infant mortality rate (deaths below age 1, per 1,000 live births) is a superior indicator of the health standard. 4/ Macedonia's infant mortality rate declined from around 140 in the early 1950's to 70 in 1972, but is still significantly above the Yugoslav average of 40; by comparison, the rate in Slovenia has dropped now to around 20. Within Macedonia, the infant mortality rates vary widely between communes. 5/ The comparison with Annex Maps 3 and 6 indicates that high infant mortality is frequently associated with a low level of economic development and high crude birth rate, and the spread ranges from as high as 123 to a low of 27. Both, high fertility rate and high infant mortality are important indicators of availability and quality of the local public health system. 23. Migration: The fact that the census growth rates exceed the natural avnWthl rma 4" n11 t4atalnnad rooInnQ nf Yiinqlvip and that the rpvprse is true for all less developed regions 6/ suggests a considerable inter-regional migrari f-rn i latter tn tho former. The vast diffPrerns in nopulation growth observed for individual communes within Macedonia also indicates the incidence of COn4derable qmwn conmmurnes in the,= Renublic- and probably out of the Republic as well. 7/ In addition to the inter- and intra- regional migration, M11AedoAW prtcpae"aCasndn region in the migra- tion of Yugoslav workers to West Europe which is considered temporary in 1/ See Annex Table 2. 2/ See Annex Table 3. 3/ See Annex Table 2. 4/ See Annex Table 4. 5/ See Annex Map 4. 6/ Coma paragraph 18. 7/ Compare paragraph 20. - 10 - nature. All these components of the complex migration phenomenon are caused by a combination of demographic and economic factors. Outmigration from the rural areas is the result of increasing population pressure on the limited land renracs of t-he rural commrne, cnmbined with the absence of any alter- native opportunities for employment. All three migration components are fueled to a large degree by this rural/urban move. The inter-regional and the external migration includes probably a considerable number of migrants from urban com- munites who are in search, for higher income- elsewhere nd ae in turn, re- placed by new immigrants from the rural communities. 24. Some indications of the extent of inter-regional migration can be found in the results of the "Last census (19-71). Table 2 II r.UBLk iCNTi-IGRATIN US 197 I (in 1,000) Bosnia-Herzegovina -337 Montenegro - 54 Macedonia - 3 Croatia + 46 Slovenia + 24 Serbia +324 Source: Annex Table 6. These figures explain in general the differences between regional census and natural growth rates in terms of inter-regional migration, although in the case of Macedonia (without almost zero net outmigration) the explanation is less conclusive. 1/ 1/ However, the data do not pertain to "migration" in the strict sense, they count the number of people who reported a place of birth in another republic than the republic of residence; this inevitably leaves scope for some error. - 11 - 25. The dimensicn of the rural/urban 1/ migration is shown below: Table 3: RURAL/URBAN MIGRATION, 1953-71 (in 000) Growth Rates 1953 1961 1971 1953-61 1961-71 1953-71/1 Rural population 801 723 657 -1.3 -1.0 -1.1 Urban population 504 683 990 +3.9 +3.7 +3.8 Total 1,305 1,406 1,647 +1.0 +1.6 +1.3 /1 The total growth rate for 1953-71 appears very low. This is caused by the very low growth between 1953 and 1961, far below the level for the preceding and the subsequent period (compare Annex Table 1). Apparently sizeable inter-republic migration accounts for this phenomenon rather than demographic forces. Source: Statistical Yearbook, Yugoslavia 1961, 1962, 1973, Table 202.5. The size of the urban population almost doubled between 1953 and 1971, and its share in total population increased from 39 percent to 60 percent, while the sze of the riral nnnulatin creases by 18 percent. The momerntum of rural/ urban migration is particularly evident in the case of Skopje, where the total population almost doubled between 1953 and 1971. 26. External migration started to .reach large proportions fter 196, when the economic reforms encouraged it to a certain extent. Because of the economic motivation, external migration h-as been primarily labor migration, with only a minority of workers taking their families with them. Most migrants retain their Yugoslav citi.zenshi&p, and-A thus the migration is cnsidered as baing temporary. These temporary moves, however, have frequently extended to periods of as long as seven or more years, and there is some concern as to how Wt.mporary this migration actually is and to the extent to which it may become ;permanent:. It is now the general view that in the long-run temporary migration is not an 1/ "Urban" is equated as total minus agricultural population, and the latter consists of all active persons who earn their livelihood in the agricul- tural sector (whatever their occupation and activity) and their dependents. Some agricultural population resides in urban settlements (however defined) some non-agricultural population in rural settlements, and the two may not balance (the second component probably exceeding the former). The figures on urban population, thus, are only approximations. - 12 - acceptable alternative to gainfull employment within Yugoslavia, but in the short-run--as lon a thp scarritv of firancial resources does not permit the generation of jobs--it is preferable to under- and unemployment. 1/ 27. The table below gives an overview of the size and composition of temporary migration abroad. T-ble 4: TEMPORARY MT(RAMT ABRT?OATD (1Q71) Percent Percent with Percent with Percent ofL actiL.ve Less than 8O Percent Agricultural 20 - 39 population years of Numbers Males Background year old (1971) education acedonia 54,433 82 54 48 7.9 60.6 LDRs 223,974 81 60 48 8.1 69.0 DRs 447,934 62 39 43- 6.0 50.0 Yugoslavia 671,908 69 46 44 6.6 56.8 Source: Annex Table 5. The figures illustrate that temporary migration is an important socio-economic factor, and in the less developed regions of Yugoslavia even more so than in the developed ones. Its importance is even higher than shown above, since there are. in addition to recorded migrants, a large number of unrecorded ones (for Yugoslavia as a whole, unreported migration is estimated about 50 per- cent of the recorded). Table 4 also shows the profile of the "typical" migrant from the Republic: male, young, from rural background, with incompleted education, and in most instances probably single. For males in the age category of 20-30 years, the share of those-working abroad probably exceeds 20 percent of the total. 1/ In addition, of course, temporary migration is to the short-run benefit of the Republic and the country as a wnole through the generation of fre-ign exchange revenues.- 28. Age Structure. As the high past growth rates and fertility suggest, the age structure of M7iacedonila is rather young. Table 5: POPULATION COMPOSITION BY AGE, 1971 (in 1,000) Macedonia SFRY Vojvodina 0 - 9 21.8 17.7 13.6 10 - 19 21.2 18.8 16.4 20 - 49 41.0 43.3 45.5 50 and older 15.9 20.3 24.5 Source: Statistical Yearbook, Yugoslavia. 1974, Table 202-3. In Macedonia, 43 percent of the population were below the age of 20, comparing with an average Yugoslav range of 36.5 percent and in Vojvodina--where the natural nonnlation growth was thp snlwet--of 30 nrcent. These differences are important in that a young age structure has two effects on future demo- graphic eunlutinn First, the nnnilatin in the chilhd bearing age continues to grow at high rates, so that high natural growth rates may persist in spite of declInIng fertIlIty. And second, the working a pnition tenrds t grow at higher rates than total population. 29. Urbanization. As shown above, about 60 percent of Macedonia's population is now non-agricultural , i. e. urban 1/in orlentation. As An-nex a t±L..L .J.~ LLU J. A.~ UUI Map 5 shows, only 6 out of 30 communes are urbanized at/or above the average. The comparison with Annex Map 6 brings out an interestlng feature: coLtary to what one would expect, only three urban communes (Skopje, Titov Veles and Stip) are in the high income .category whereas two of the remaining (Debar and Skip) are urbanized and poor. This poor correlation between degree of urban- ization and income level points to the role of unemployment, temporary migra- tion of family heads and non-agricultural underemployment in many of the less developed communes. 1.3 Prospects 30. The past high population growth created problems for the develop- ment of Macedonia and will remain so for some time to come, because of the existing demographic momentum. High population growth rates reduce any com- parative per capita indicator (like GMP per capita or doctors per inhabitant). A less visible but more grave effect is the fact that high population growth absorbs scarce resources for the expansion of education, health care and 1/ Both are strictly speaking not identical; compare footnote 1, paragraph 25. - 1 .1 4 urbanization, which in turn reduces the potential for investment for economic growth. High population growth also translates into rapid increase of the working age population, for which no adequate employment opportunities can be generated, given the limited financial resources. 31. Because of the strategic role of population growth, the mission pro- jected it up to the year 2000, using the "component method". This model and the input data are discussed in some detail in Appendix II. Permanent net migration is, in the absence of any more suitable hypothesis on size and com- position by sex and age, assumed to be zero. The model generates the following summary results: Table 6: POPULATION PROJECTION 1971-2000 (mid-Year) Pooulation Growth Rate 1971 1,653 1.47 1975 1,752 1.53 1980 1,890 1.32 1985 2,032 1.32 1990 2,168 1.32 1995 2,294 1.15 2000 2,410 1.01 Source:. IBDrojecton. This projection is somewhat lower than the official Yugoslav projection for intermediary years but corresponds closely to it in the final year. 1/ This coincidence is not by accident but originates from our choice of the latter projection as the target for our own. The purpose of our own projection, thus, was not to improve the former, but (a) to understand the demographic im- plication of the official growth projection 2/ and (b) to generate the break- down of projected population by age and sex for further analysis in a different context. 1/ The official Yugoslav projections are as follows (in 0000): 1975 (1,767), 1980 (1,913), 1985 (2,053), 1990 (2,183), 2000 (2,413). See Statistical Yearbook, Yugoslavia 1974, Table 202-2. 2/ As discussed in Appendix II, the projectiGn of total population implies assumptions on the determining demographic parameters which appear on the high side. Therefore, the projected population growth could in the view of the TBRD staff, he somewhat exaggerated. 2. Labor Force and Absorption 2.1 Size and Determinants of Labor Force 32. During the intercensal period 1961 to 1971, the total active popula- tion (labor force) of Macedonia grew slightly more slowly than total popula- tion: Table 7: CHANGE OF ACTIVE POPULATION, 1961-71 (percentage) Macedonia LDRs DRs SFRY Total Labor Force +13.7 +7.0 +6.4 +6.6 Resident Labor Force + 4.8 -1.7 0.7 -0.5 Source: Statistical Yearbook. Yugoslavia 1971, 1974, Table 202-4. However, as mationne before the figires on resident labor force correct only for those workers living temporarily abroad who are explicitly recorded in this category in the 1971 ceAnsu Due to the si7ph1p rrprnrder migration, the correct percentages would be several points smaller, so that in Macedonia ..l.. -S 1..... -.A ,-.. , a h,'n- A q4"np -i p pq c v-liy iqs;n1a thLe resident labor force remained probaby unhage ine heerl 60s 3. T1e activity rate remid essentally unchanged 9 A to around 38 percent in 1971. It is determined by two factors: (a) a "demo- graphic parameter" (the size of the working age population 1/), and (b) a com- plex "social parameter" (as expressed by the participation rate in the working age population), and the overall activity rate is determined as the algebraic product of the two parameters. The contribution of these two parameters to the determination of the activity rate is expressed in Table 8. 1/ Working age: 15-64 for males; 14-59 for females. In Yugoslavia the statistical working age for females is usually extended to age 59. How- ever. for the analysis as well as for any projection the difference is insignificant in view of the ambiguous concepts for the "activity" for the female pooulation active in individual sector agriculture. Table 8: DETERMINANTS OF ACTIVITY RATE-: (1961-71) (shares in percentages) 1961 1971 Macedonia SFRY Macedonia SFRY DRs Working age/total population 52,5 55.4 56.6 58.8 60.5 Active/working age population 75.0 81.1 67.6 73.6 79.0 Active/total population 39.4 44.4 38.3 43.3 47.8 /1 The activity rate is derived by multiplying the ratio of working age to total population times the ratio of active to working age population. Source: Statistical Yearbook Yugoslavia 1971, 1974, Tables 202-3, 202-4. Due to the more rapid population growth in Macedonia, the demographic para- meter was lower than in Yugoslavia in both years, but it rose both in Macedonia and in Yugoslavia as the result of the decline of fertility. Similarly, the social parameter was lower in Macedonia in both years, but it was falling in Macedonia at- about the sae rate a the Yuoslan nernage Aq a rPi1t of these conditions and trends, the overall activity rate of Macedonia declined slightly and wa persstently more than 10 percent below the Yugoslav average and 20 percent below the average of the developed regions. The situation and evlution in MAcedonia resembles in prin-ciple that intJ ohe-Dso Yugoslavia, with the exception of Kosovo where both parameters grossly deviated from the average. 34. The lower level and the different evolution of the social parameter can be traced back further by looking into the respective ratios of active or working age population by sex-. Table 9: WORKING AGE AUTIVITY KATS, BY SEX (percentages) 1961 1971 Macedonia SFRY Macedonia SFRY Active/wo. age population 75.0 81.1 67.6 73.6 Active/wo. age population, male 96.3 95.9 86.1 87.1 Active/wo. age population, female 49.3 63.2 45.2 58.7 Source: Statistical Yearbook, Yugoslavia, 1971, 1974, Tables 202-3. 202-4. - 17 - For both males and females the ratios declined everywhere somewhat over time, probably largely due to extended education. But while for males the ratio was in Macedonia always very close to the Yugoslav average, Macedonia's female activity rate was persistently only 77 percent of the Yugoslav average. By comparison, in Slovenia, the most developed republic of Yugoslavia, the female activity rate came to as high as 81 percent in 1971. 3. Si-nce the differPnceq in the value of the social parameter between Macedonia and the Yugoslav average can largely be traced back to the partici- pation of workn-agea famale, i- would be important to un ernd the reasns for this phenomenon, and for its persistence. One obvious factor is the larger family size in Macedonia -in 1971, 4.7 compared with 3.8 in YugoSvia) originating from the higher natality, which reduces the number of working-age females who are -In th posit-ion to assume employment. A seon factor is the fem .L IL ILl=~ A.U.A L..L U~~AZ ItJULl L. rX AJ.~ secon SJ A. .A. l lack of female employment possibilities outside the household and the family farm in an environment with persisting large male under- and unemployment, and" a smaller social sector with many capital intensive basic industries. A third factor is the incidence of specific traditions in.some.parts of the Republic, which reduces social acceptance of female work outside the confines of the family. 36. Another feature of the labor force situation is revealed by the activity rates in the two major socio-economic sectors: Table 10: OVERALL ACTIVITY RATES BY MAJOR SECTORS /1 (percentages) _1961 1971 Macedonia SFRY Macedonia SFRY Agriculture 58.3 56.1 44.2 49.8 Non-Agriculture 33.7 39.1 31.5 39.4 Total 39.4 44.4 36.7 41.6 Share of agriculture in total labor force 58.2 56.1 47.8 37.3 /1 Calua on the basis of resident labor force and population and hence excludes persons listed as temporarily working abroad and their dependents. Source: Statistical Yearbook, Yugoslavia, 1971, 1974, Tables 202-3, 202-4, 202-5. The activity rates declined in both sectors, both in Macedonia and in total Yugoslavia. Most of the decline of the total, however, can in both cases be traced back to the agricultural sector which lost buoth, population and employ- ment, but the latter at a faster rate than the former. The rapid decline of the importance of agriculture as a provider of gainful jobs becomes partic- ularly evident in the declining share of the agricultural in the total labor force. 2.2 Under- and Unemployment 37. The stabilization of the resident labor force over the last decade seem to indicate that the under- and unemployment problem of Macedonia, what- ever its size, has lost some of its urgency. Nevertheless an attempt to es- timate its true dimension would still be informative, because it would high- light the problem of absorbing this redundant labor force locally at accept- able income levels. Four components of unabsorbed labor force, notional rather than clearly defined and distinct from each.other, can be distinguished: (a) "open unemployment": individuals without any work and actively looking for contractual work, i.e. for "emDloyment"; (b) "underemployment" (mostly rural): individuals considered or considering themselves as "active" in a self-employed or self- employed dependent position, which generates so low an income that they would switch to contractual employment if such was offered; (c) "temporary migration : individuals of the open unemployment or the underemployment category who accepted contractual work outside Yugoslavia but do intend to return; (d) "repressed unemployment" (rural as well as urban): individuals in the working-age group who are not considered or not consider- ing themselves as "active" because of the absence of any expecta- tfon for f-nding an acceptable job. Some data for nnpn imPmplovment and temPnnrrv miation are available. Rural underemployment would have to be estimated by means of a hypothesis of the necessary rural labor force, i.e. through the technically required labor land ratio at a given output mix and technology. The estimate of repressed unemploy- ment would require a hythesis of4the "true 4a of cti.Ve .to workingag population. 38. In order to assess orders of magnitude of the present size of the unabsorbed labor force, the following guesses may Serve as a fiLs appruximaluion for the situation in 1971: (a) Open unemployment low 23,000 high 41,000 (b) Underemployment low 60,000 high 130,000 (c) Temporary migration 50,000 1/ (d) Repressed unemployment low 56,000 high 100,000 Total low 189,000 high 327,000 The figures originate as follows: (a) Low: Cpnqus 1971: Statistical Yearbook- Yugoslavia. 1974, Table 202-5. High: 1973 Stts a Yearbook, Mnacedonin 1Q7L, pagca 79 (First time job seekers) (b) Compare Chapter D.1 paragraph 180. (c) Census 1971. (d) Low: assuming for Macedonia the same ratio of active to working- age population for Yugoslavia in 1971, compare Table 7. High: as above, but on the basis of the average of the developed regions, compare Table 7. 39. While the comparison of the recent official unemployment figure with the resident labor force shows an unemployment rate of around 7 percent, the low estimate of unabsorbed labor force in relation to adjusted total labor force would come to around 30 percent and the high estimate to around 48 percent. By comparison, Macedonia's total "employment" 2/ in the social sector, i.e. the only growing labor absorbing socio-economic sector, accounted for about 300,000 workers in 1973; unabsorbed labor, thus, is in the order of 60 to 100 percent of labor in the sector which would have ultimately to absorb most of the surplus". 1/ This figure is probably an underestimate as it relates to only recorded temporary migrants. Substantial unrecorded migration is also believed to have taken place, see paragraph 27. However, since the numbers involved are likely to be counted in the rural sector and be included under (b), the total estimates of unabsorbed labor would remain largely unaffected. 2/ Ninety-eight percent of all workers receiving labor income are employed in the social sector; the self-employed in agriculture and other economic activities are in the Yugoslav statistics not counted under "employment". - 20 - 40. These estimates have to be viewed in a dynamic perspective. All but the openly unemployed appeared presently to be absorbed one or the other way. But in the course of time (possibly over the next decade or so) many of them will due to the expectation for gainful employment at home--gradually come into the open. and look for absorption in the high-income sectors of the economy of the Republic. To this backlog of latent unemployment there will have to be added the natural increase of the working age population and labor force, and the combination of both components is likely to cause very severe strains on the economy and society of Macedonia for at least two decades to come. 2.3 Prospects 41. The dimension of the employment problem which Macedonia will be facing over the next decades is determined by the three components: (a) the natural growth of the working age population, by age and sex, derived from the population projection 1/, (b) the effects of changing social patterns on the fcutv rnte of the- wnrkingy agp nontilation, and (c) the gradual elimination of the backlog of under- and unemployment. The role of the first two compo- nents is set out in the table below: Table 11: PPOJECTIONS OF T-(ORKTM AGE POPTLATTON ANT TAROR FORCE /1 1971-2000 Work Age Population Labor Force AV. LInU.L A. annual Total increase Growth Rate Total increase Growth Rate 14 ^f%A~\ I4rff\ O\ Ann\a' Ann'A O 1971 931 UJ 1975 1,008 19.3 2.01 697 16.7 2.29 1980 1,095 17.4 1.67 780 17.2 2.12 1985 1,180 14.8 1.22 867 15.8 1.76 1990 1,254 16.6 1.29 946 17.6 1.79 1995 1,337 17.0 1.24 1,033 16.5 1.55 2000 1,422 1,116 /1 The official Yugoslav projection foresees a somewhat higher trend of work- ing age population as follows (in '000): 1975 (1,082), 1980 (1,192), 1985 (1,295), 1990 (1,385), 1995 (1,473), 2000 (1,554). From: Projection of Population of Yugoslavia 1970-2000, Volume I, pp. 83-85, Belgrade, December 1973. If the dynamics of population growth is overestimated, the growth of both working age population and labor force would also be somewhat slower, but less markedly since all additions to the working age population until 1986 are already born. Source: IBRD Projection. 1/ See paragraph 31 and Appendix II. - 21 - Total labor force is projected by multiplying the projected working age popula- tion (by sex) with the projected respective participation rates. For males, the present rate of 86.1 percent was kept constant. For females, the present rate of 45.1 percent was, irequal rin reme-nts, raised to 70 nercent, about half way between the present Yugoslav average of 58.7 percent and the present Slovenan verage of 81 .1 percent. The impliedi t-Mtal activity rate of 46.5 percent for the year 2000 would be about half way between the present Croatian rate of 45.5 and the present Slovenian rate-of 46.9 percent. 12. As the figures of Tables 6 and T1 show Ith work-ing,age population rl -LL L . A. AJ. L.L U d.U I I ~I[LOW , eLI wq k. J_6 #_. .~. is growing at a higher rate than total population, and the labor force at a [ugher rate than the working age population. For the working age population, the annual increments and the growth rates decline fairly quickly, but after 1985 the "echo effect" of the irregular age distribution comes into operation. 1/ The high growth rates of labor force are politically affected by the growing population of the female population in work outside the confines of the house- hold. By the year 2000 the labor force would still be growing by around 1.6 percent per year. 43. As to the backlog of under- and unemployment 2/, if it were to be gradually absorbed in equal annual increments over a period of 15 years, this would translate into annual additions to employment of around 9,000 (low assump- tion) to 15,000 (high assumption) per year 3/. The resulting totals of 26,000- 32,000 per year compare with the recently achieved and anticipated annual in- crements of employment in the social sector as follows: 1952-60 11,800 1960-65 9,900 1965-70 4,200 1970-75 14,700 (estimate) 1975-80 16,000 (Plan target) 44. This comparison shows that the momentum of economic growth is barely sufficient to completely absorb the natural increase of the labor force before the early 1980's; only thereafter can, by initially small margins, the backlog of under- and unemployment be eliminated. Some of the assumptions underlying this assessment may be open to question, but the major conclusion appears firm. Employment generation is likely to remain for at least another 1 or 2 decades a major, if not the mainr dvelopment nrnhlm nf Macedoni. Ge tinuing limitation of available investible resources and the competing claims 1/ The result of increased mortality and reduced natality during World War I -A II Which iSS4 ------ stl reonzal in eac susqun gen rtion 2/ See paragraph 37' above. 3/ Net of the "repressed unemployment component" which is already covered in the labor force projection by the rising female participation rates. - 22 - for their use, the growth Of the-soial sector rannot be expected to quickly and smoothly resolve the problem. Furthermore, if the components of unabsorbed lab-or force surface at a faster rate t*a-- assumed in the assesst above Macedonia might well pass through an extended period of simultaneous rapid economic growth and rapidly rLising open unemployment. A to&-Uh -4migrat4o (temporary migration abroad and permanent migration to other regions of Yugoslavia) had 'u the past provided some outlet for surplus lavor iu Macedonia, recent trends indicate only a minor role. 1/ The major solutions for for such course of events are, therefore, a more labor intensive path of de- velopment .and an improved capacity of the .ind-ividual sector to retain or ab- sorb permanently a considerable proportion or the additions to the labor force. B. INCOME DISTRIBUTION 3.1 Income Distribution by Regions 45. An overview of the disparities between regions is given below: Table 12: INTER-REGIONAL INCOME DISPARITIES, 1972-73 (Percentages of Yugoslav Average) (1) (2) (3) (4) Output Net Personal Per GMP Per Household Income Income Per Worker Cap. 1972 Per Cap. 1973 Worker, 1972 /1 1972 /1 Bosnia-Herzegovina 67 76 93 88 Mntenegr 75 82 93 90 Macedonia 69 78 85 81 Kosovo 33 49 83 78 LDRs 62 72 90 85 DRs 121 116 103 105 / IEconomic activities, social sector. Source: Annex Tables 7, 8, 9, 10. The inter-regional income disparities are commonly expressed in terms of Gzr per capita. The figures show Macedonia at about the same level as Bosnia- Herzegovina and Montenegro, slightly above two-thirds of the Yugoslav average 1/ In view of prevailing economic conditions in Western Europe, there has been in recent years a net inflow of Yugoslav workers from abroad. - 23 GMP is not a totally satisfactory measure since it includes many components which do not affect the income available to individuals and it excludes others (like income from non-economic activities, transfer incomes, etc.) which play a maior role. Therefore, hoishold inroms nper canita, as P .nti d through sample surveys, give a more realistic picture. The income disparity by that yardstick is--as is to be epted--sehat ls w If nn- monetary elements affecting the standard of living (health care, education, where the LDRs benefited from inter-regional budgetary transfers) are included, the differences would be narrowed further. 46. A look at the levels of average net personal incomes per worker received in the socijal sector (Column 3) show a significantly more narrow spread than either of the previous distributions. The averages of the regions differ so little from the country average that--for a standardized family size--they are almost insignificant. In other words, except for the effects of differences in family size (the Macedonian average of 4.8 compares with a Yugoslav average of 3.8) the standard of living of those dependent on the modern sector of the economy is not very different-in all regions of Yugoslavia. Another interesting observation results from the comparison of average net incomes and average productivities (Column 4). The latter differ by more from the average than the former. That is to say, the policy of equating inter-regionally incomes levels in the social sector has proceeded to a point where in the less developed regions income levels exceed the levels as justi- fied by productivity, with obvious effects on production costs and/or accumulation. 1/ 3.2 Income Distribution by Socio-Economic Sector 47. The preceding discussion implies that there must be substantial inter-sectoral income differentials within each region. Indications are given below: Table 13: INTER-SECTORAL INCOME DISPARITIES, 1972/73 (percentages of Yugoslav average) Personal Income/2 Per Active. 1973 Household Income /1 Individual Social Per Capita 1973 Sector Sector Agriculture Mixed Non-agricultural (Gross) (Net) Bosnia-Herzegovina 61 67 100 54 126 Montenegro 58 78 94 63 130 Macedonia 67 73 88 57 114 Kosovo 39 48 61 47 106 LDRs 58 65 90 54 118 DRs 78 104 140 68 138 Yugoslavia 70 89 125 64 134 /1 Total Yugoslav household income per capita = 100. /2 Total Yugoslav personal income per active 100. Source: Annex Tables 9 and 10. 1/ Comoare naragranhs 80 98- - 24 - The data on household income per capita bring these inter-sectoral relations out quite strongly. They suggest that--whatever the size distribution within each of the three socio-economic categories--the incidence of poverty 1/ is in all parts of Yugoslavia (with the possible exception of Kosovo) restricted to households which have exclusively or predominantly their base in agricul- ture. 2/ Given the negligible size of the agricultural population linked to the social sector (in 1971 only 5 percent of the active population in agri- culture) the "agricultural" and most of the "mixed" households can be equated with the individual sector. In non-agriculture, the differentials between the regions and the Yugoslav average appear only moderate in view of the differences in average household size; the latter aspect is particularly relevant for Kosovo where the average is above 7, compared to 3.8 for the Yugoslav average. The differences in income from work per active person bring these inter-sPctora1 diffPrnceq sharnper into forus, by disregarding family size and the impact of transfer income. In sum: with some simplification, one can identiy a2 cnsieraladgre- of "dAism" betw-en a Mn (mostly social) sector with moderate income levels and a traditional (mostly indi- vAid4ual agricultural) sector with low income levels, 1/ 48. Anothe fcor in the inom disribkution betwen the soc4o- ~40 An~IU LIILM L c%LU .1.n tLeL .LncomeI U.L . A.U L.&.o bJ Ll ~A. economic sectors is their respective size within each region. 1/ "Poverty" is in the Yugoslav context to be interpreted as "relative poverty". Nowhere in Yugoslavia are sizeable groups living in "absolute poverty", lacking severely with respect to minimal nutritional standards and void of clothing, shelter, and provision of basic medical protection against infectious diseases. 2/ However, not all individual farmers are poor. Where soil and water con- ditions are favorable, an average holding of 2-3 hectares-could provide a satisfactory level of income. See paragraph 179. .3/ Compare paragraphs 7 and 178. - 25 - Table 14: RELATIVE SIZE OF SOCIO-ECONOMIC SECTORS Share of Employment Share of Population Resident Labor Social (%), 1973 Force (%), 1972 Sector In Agriculture Individual Social Pooulation Plus Mixed Non-AgricuLture Sector Sector (%), 1972 Bosnia-Herzegovina 67 33 54 46 15 Montenegro 55 45 44 56 17 Macedonia 57 43 49 51 18 Kosovo 68 32 60 40 9 LDRs 64 36 53 47 i5 DRs 53 47 47 53 24 Yugoslavia 56 44 48 52 21 Source: Annex Tables 8, 9, 10 By bLL counts, popuLation and active persons, the relative size of the social sector is strongly correlated with overall per capita income. The figures on shares of resident labor force understate this relationship, since the indi- vidual sector includes unemployment and underemployment, both of which are the higher the lower the average GMP per capita of the region. An additional con- firmation can be found in the percentage of employment (in the social sector) in total population. 49. In comparison with these disparities between the socio-economic sectors, the disparities within the social sector (by categories of skill) appear almost insignificant. Table 15: NET PERSONAL INCOME PER WORKER, BY CATEGORY, 1972 (Percent of Yugoslav Average) Macedonia SFRY "High Technical Qualification" 160 189 Average 85 100 "Unskilled Workers" 62 72 Source: Statistical Yearbook of Yugoslavia, 19741 Table 220-5. The distribution between categories is fairly narrow in each region and the distribution of various regions are very similar. Thus, differences in the skill composition of the labor force do not have a measurable impact on inter-regional income disparities. 3.3 Income Distribution by Size Groups 50. The size distribution of income (household income per capita) is summarized below: Table 16: SIZE DISTRIBUTION OF HOUSEHOLD INCOME PER CAPITA, 1973 (Percent of Population) Yugoslavia Macedonia Income Grouo Total Agricultural Total Agricultural Low (below 67% of Yug. Ave.) 30.2 64.2 55.1 78.5 Middle (67-1 50% of Yug. Ave.) 58.8 29.7 37.3 15.2 High (above 150% of Yug. Ave.) 11.0 6.1 7.3 6.3 Source: AnnxTbl-1 Tle 'Low 'income category (as dLelined above) comprises in Macedonia _55 percent of the population, as compared to 30 percent in the Yugoslav average. It follows from the previous analysis that probably most of the rural population in the individual sector falls into the low income group, whereas the urban population associated with the social sector probably accounts for most of the middle and high income groups. 1/ By comparative standards, however, in both regions the income distribution can be considered as fairly "egalitarian': the Gini-Coefficients in both total Yugoslavia and Macedonia have been esti- mated at 0.31. 3.4 Distribution by Communes 51. The emphasis of economic development on certain "growth poles" in the modern social sector has--in conjunction with the discrepancies of the natural and the demographic conditions--led to an uneven development between communes within the Republic. The following Annex Maps illustrate these dif- ferences: 1/ The nprcentages fnr agrIctultural nonulation in the high income group are affected by both rounding and sample errors, particularly in Macedonia. Map 1: Population Density Map 2: Change in Population Map 3: Crude Birth Rate Map 4: Infant Mortality Map 6: Per Capita Income Map 7: Share of Employment in Population Map 8: Share of Agricultural Population 52. The distribution of NMT per capita.by commune is summarized below: Table 17: INTER- AND INTRA-REGIONAL INCOME DISPARITIES, 1972 (NW per capita) 1,000 % of Macedonia Percent of Din. Average Population Highest income commune (Skopje) 10.8 144 23.6 FiU highpt incoma comnes 10.7135 Five lowest income communes 3.5 47 10.5 Lowest income commune (Brod) 2 09 0.9 Average Yugoslavia 10.5 140 Source: Annex Table 12. The average NMP per capita in the five most developed communes--and there are several others close to that level--which account jointly for more than one-third of the population, is more than 3 times that of the poorest five communes, and above that of the Yugoslav average. Thus, the problem of - Macedonia's insufficient state of development in comparison to total Yugoslav is repeated within the Republic. These differences reflect (in addition.to differences in physical endowment) the previous development policy. The five highest income communes commanded in 1972 more than 70 percent of all assets of the social sector, whereas the poorest five had below 2 percent; on a per capita basis, the top five communes had almost 20 times the fixed assets than the poorest five. This disparity is, if anything, likely to widen. In 1972 about 60 percent of all social sector investment took place in the top five communes, whereas the bottom five accounted for about 3 percent; on a per capita basis, investment differed by the same ratio as available fixed assets. 53. As mentioned before, the relative size of the social sector is a major factor in determining the income per capita differences: - 28 - Table 18: RATIO OF EPYLOYMLNT TO POPULATION; 1972 Percent Percent of Average Five highest income communes 26.8 151 Five lowest income communes 9.8 55 Average Macedonia 17.7 100 Average Yugoslavia 20.5. 116 Source: Annex Table 12. As for income per capita, the top five communes reached a level largely above the Yugoslav average- whereas the bottom five remained at about one-half the Yugoslav average and about one-third of the top five communes. The correla- tion bhteen incnme per capita and the ernnlnyment rntin in the rnmmunes (linear regression) is significant and R2 comes to around 0.68. The correlation be- tweenincome per capita, and ratio of employment in population and total sncial sector fixed assets per capita (linear regression) improved R2 to around 0.72. 54. An equalizing factor can be found in the availability of budgetary resources. Due to sizeable transfers from the Republic budget to the least developed communes, the disparities are small: the five poorest communes IdU LL 1972 UUUeLLY resources at their Uisposal which (on, a per cap-Ita basis) came to almost two-thirds of those in the top tive communes. Other relevant parameters in the context of intra-regional development are presented in the Annex maps. 55. In recognition of these differences between communes in degree of economic development, Macedonia has set up a system for transferring special funds to the least developed communes, both as long-term loans (for economic investment) and budgetary grants (for social services). 1/ 3.5 Summary Evaluation 56. Summarizing these observations on these inter-related aspects of in- come distribution, it is evident that the comparison of GMP per capita between Macedonia (or any other region) and the Yugoslav average can be misleading if interpreted as an indication for the existence of income disparities across the board. The root of the disparities between average GMP per capita is the combined effect of income differentials between socio-economic sectors within each region, income differentials between the regions for each given socio- economic sector, the relative size of high and low income socio-economic groups, and the incidence of differences in family size and/or dependency ratios. In ta-rk simplifirtion, one can single out the agricultural population which does not have access to supplementary income (from work or from transfers) as the low Income group in all parts of Yugoslavia; the "dvrP of dpvPlonmPnt" (if expressed in GMP per capita) of the regions is inversely related to the propor- tion of the rural populatIon with no access to supplemenr incme in the social sector. 1/ See paragraph 117. - 29 - C. THE MACEDONIAN ECONOMY 1. Macro-Economic Characteristics 1.1 A Comparative View to Macedonia's State of Development 1/ 57. As indicated in the historical overview, Macedonia was a relatively latecomer .in the development process and hence lags, in*terms'of basic eco- nomic and welfare indicators, behind the Yugoslav average and well behind the average of the more developed regions. The present state of development of Macedonia, however, also reflects its relative natural, human and capital resources endowment and its development orientation over the past years. Maedonia's histnrina1 shortage of canital resources is also reflected in the low employment ratio and in a low ratio of fixed assets per capita and in a deficient physical And social infrastruure qiin generAl. The incidence of a high proportion of the rural in total population and of a low share of .1-ltj 1rn7k 1 ln"A v-mat.l f-a 4, ~v 1 n 1nn44 w ~,A le% ln'k-wrirlaPt u4 v ivable land sults in rural ovrorulation- and low labor produtiit the agricultural sector and contributes markedly to the depressed levels of personal incomes and GMP per cap ita for the Reubi as a whole. 5. Teeo o of --edoia togthe w -- -It' other less devel opedA re- JQ. lilt: rCULULRIY I. iIat.UUU.LCL, LV6=LI=L WJ.LIL .LiI L "=UV=j.L = L gions, however, exhibits certain dynamic growth characteristics which are to be examined below in Section 1.. The following table gives some details of the comparative state of Macedonia's development in relation to the Yugoslav average and other Republics and Provinces. In 1972, iacedonia's "employment ratio" (ratio of employment in economic activities in the social sector to total population)--which provides some measure of the extent of gainful em- ployment in non-agricultural economic activities--was above that for the less developed regions as a whole and of individual regions with the exception of Montenegro, but was lower than that in all developed regions and of the coun- try as a whole. 1/ This section sets out some of the general economic features which charac- terize Macedonia's development in comparison with other regions of Yugoslavia. Characteristics of specific economic and non-economic sectors are discussed in more detail elsewhere under the respective headings. For a broad discussion of the regional development problems in Yugoslavia see IBRD Report 194a-YU (Basic Economic Report, 1973). - 30 - Table 19: EMPLOYMENT, PRODUCTIVITY, WORKERS INCOME AND UNIT LABOR COST, 1972 (percentages of Yugoslav average; social sector economic activities) Employm7yt /2 Workers Unit Labor Ratio - Productivity- Income/3 Cost /4 Bosnia-Herzegovina 74 88 93 105 Montenegro 85 90 91 102 unmannin 84 81 83 102 Kosovo 37 78 85 109 LDRs 71 85 89 104 Croatia 116 109 109 100 Slovenia 173 123 117 95 Serbia proper 99 96 93 97 Vojvoadina 11 9 9 I r%c aa. DRs 11f15l0u9 /1 Employment is social sector economic actiVilte to total- population. /2 GMP per worker. /3 Net personal income per worker plus contributions on account of personal incomes. /4 Ratio of average workers7 income to average productivity. Source: Statistical Bulletin, No. 830, Yugoslavia, 1973. 59. In all less developed regions the average productivity was well below those in the developed regions, with Macedonia representing 81 percent of the Yugoslav average. Gross personal income per worker was also below the Yugoslav average for all less developed regions, but the deviations were more narrow than those for average productivity, resulting in a higher unit labor cost for the less developed regions as a group vis-a-vis the developed regions. Among the less developed regions, the shortfall in productivity below workers income was most evident for Kosovo and Bosnia-Herzegovina, whereas for Macedonia and Montenegro the difference from the Yugoslav aver- age was narrow. As labor cost and the state of development appear inversely correlated, this phenomena has an important implication with respect to re- source utilization. In all less devAloped regions, where labor is abundant and capital particularly scarce, there exists a tendency towards an overall competitive disadvantage with respect to lab-or cost and a competitive advan- tage with respect to capital costs. 1/ This competitive disadvantage (ad- vantage) is the stronger, the more labor intensive (capitalintensive) the respective activity. 1/ The subsidy element in preferential credits (see paragraph 115) works in the same direction. - 31 - 60. The development of output and capital accumulation (fixed assets) over the past decade is indicative of the orientation and state of develop- ment of Macedonia as comnared to the other regions of Yugoslavia: TAble 90: TRNFDS OF GRRO MATERTAT. PRODUCrT AND TYE ASSETS, 1961-71 (at constant 1966 prices) % o A-eeAnnual GrowhRaes, GMP GMP/Capita Fixed Assets nIion 196-66 1966-f-71 I961-6 1966-4K71 1961664 1966r-71 A= . L L;PU I UVU IWv iUU 7 i VU I 00 I -U1J 9 I"I I #~ r I. I r I- fl A 0 1. SFRY . 6.3 6.4 9.4 9.0 8. 4 Bosnia-Herzegovina 6.7 3.9 7.0 7.5 Montenegro 7.2 6.3 5.8 5.3 15.3 6.0 Macedonia 9.7 8.1 7.9-- 6.5 10.9 8.8 Kosovo 10.6 5.2 7.9 2.5 14.8 11.2 LDRs 7.8 6.0 6.1 4.4 9.3 8.0 Croatia 7.0 6.5 6.1 6.0 7.8 8.5 Slovenia 6.7 7.7 5.7 6.9 8.0 8.1 Serbia proper 7.6 6.2 6.7 5.4 9.3 9.4 Vojvodina 9.5 5.2 8.8 4.8 13.2 6.9 DRs 7.5 6.4 6.6 5.8 8.9 8.5 1 Social sector only. Sources: StatiRtical Yearbook, Yugoslavia, 1974, table 204-2. Studije, Analize i prikazi, no. 62, Yugoslavia, 1973. For the decade of the sixties as a whole, the Yugoslav economy realized aver- age annual growth rates of 7 nprrpntr n 8-7 nprcent for GMP and fixed assets respectively with almost identical rates being recorded for both developed and less developed reg4o- as a gu..n rhe enomy has, 4i all raginns fared better in the first half of the decade (with rates of growth of 7.6 p GMPl andJ of 90 percent...4- .for fixed assets)/ than in the second half (6.3 percent and 8.4 percent respectively). For the less developed regions, DothL growth rates were in.LtL.Ly Li.LghLer--Uut dropped Ue.loW tLh lv of the developed regions in the second half of the decade. In Macedonia, both rates also dropped but remained in the two subperiods above the Yugoslav average. The average annual growth rates of fixed assets and GMP in 1966-71 were on the whole lower and more evenly distributed among the regions of Yugoslavia. Although for Kosovo and Macedonia the growth rates of fixed assets exceeded the Yugoslav average, this was accompanied by a faster than average increase of GMP in Macedonia but not in Kosovo. The comparison of the two growth rates between regions and with each other for each region, therefore, suggests that Macedonia has done particularly well. Its growth - 32 - of GMP is higher than that of any other region of Yugoslavia and, in compari- son with the growth of fixed assets, suggests an overall growth performance almost equal to Slovenia, the most developed of all regions of the country. 61. As a result of the higher rates of population growth of the less developed regions, their average annual growth rate of GMP per capita was sys- tpmatically dampened below that of the developed regions. Combined with some deceleration of economic growth, the increase of GMP per capita between the less developed And deueoped regions of Yugoglavia-diverged more in the sec- ond half of the sixties as compared to the first half. If gross material pro- duct per ceIndicator of relative material welfare, the position of the less developed regions as a group deteriorated somewhat in comparison to the developed regions. Howevr, this ncssesment excludes Macedonia, where the growth was persistently higher than in the other less dieveloped regions and where--for the decade as a who-Wle--thegothrt exceeded that of any other region of the country. 62. The favorable growth performance of Macedonia is particularly evid- ent from the comparison of the evolution of the differences of GM and fixed assets per capita. Table 21: GROSS MATERIAL PRODUCT AND FIXED ASSETS PER CAPITA, 1961-71 (at constant 1966 prices: percentages of Yugoslav average) - of Yuposlav Average GMP/Capita Fixed Assets, Capita Region 1961 1966 1971 1961f 1966 1971 Bosnia-Herzegovina 73 69 64 91 82 78 Montenegro 73 71 71 96 127 113 Macedonia 64 69 72 61 65 64 Kosovo 36 38 33 34 41 43 LDRs 65 64 61 76 75 71 Croatia 121 120 123 129 124 128 Slovenia 177 171 184 202 194 193 Serbia proper 97 99 99 79 81 86 Vojvodina 111 124 121 83 103 99 Dps 117 119 121 112 113 116 /1 Social sector only. Sources: Statistical Yearbook Yugoslavia, 1974, table 204-2. Studije, Analize i Prikazi,_ no. 62, Yugoslavia. 173. - 33 - Macedonia's rate of GMP growth over the past decade improved its relative position in terms of GM per capita significantly as compared to the other less developed regions. In 1971, however, its real GMP per capita still reDresented only 72 percent of the YtnqAv average and amost 60 np nf the average of the developed regions. In comparison to other less developed regions, the duelnpment nAttrn of MeAedonia was, also notable by the fact that the growth of GMP per capita was accompanied by a relatively less than ro oal inceas- of -fxed as-sets per apita in the s ecc nd half of tL4e decade relative to the first. 63. The growth performance of Macedonia and other less developed re- gions of Yugoslavia has to be also viewed within the framework of the avail- ability and utilization of the relatively scarce investment resources. As to be further examined, efforts to bridge regional income differentials have involved large transfers of investment resources to the less developed re- gions through the Federal Fund mechanism, supported also by budgetary grants for narrowing differences in the social standard. This has enabled them to achieve high ratios of realized investment 1/ to GMP in the social sector and of realized investment per worker and per capita. Table 22: REALIZED INVESTMENT AND INVESTMENT RATIOS, 1970-72 SOCIAL SECTOR, ECONOMIC ACTIVITIES (% of Yugoslav average) I/GMP Region I per Capita I per Worker Ratio (%) % of Yug. Average SFRY 100 100 26 100 Bosnia-Herzegovina 79 105 31 121 Montenegro 171 221 57 222 Macedonia 84 100 33 128 Kosovo 52 136 46 178 LDRs 82 116 35 137 Croatia 111 95 22 86 Slovenia 171 98 21 82 Serbia proper 95 97 26 102 Vojvodina 92 01 22 8 1R 110 5A 23 Source: Statistical Yearbook, Yugoslavia, 1974, Tables 202-2, 203-8, 204-8, and 217-1. 1/ Data on realized investment is available only for recent years and is superior for analytical puroses the cash transactions (payments) approach for which long time series data exist (see Appendix I). As the figures indicate, the investment ratios were in all less developed re- gions higher than the Yugoslav average and well above those of the developed regions. The investment ratios were highest for Montenegro and Kosovo repre- senting 57 percent and 46 percent of GMP for the two regions respectively. For Macedonia and Bosnia-Herzegovina, the investment ratios were in the order of one-third of GMP and were 21-28 percent above the Yugoslav average. As the subsequent analysis of sources of financing of investment would demon- strate, the investment ratio for Bosnia-Herzegovina involved a higher propor- tion of self-financing than was the case for -Macedonia. 64. The variation of realized investment per worker was comparable to that of investment ratios, yet the spread between the less Jeveloped and de- veloped regions was less striking and, with the exception of Montenegro which was on the extreme high end, varied relatively closer about the Yugoslav aver- age. However, in spite of the significant annual transfer of capital re- sources to the less developed regions, realized Investment per capita for 1970-72 wAs still below the Yugoslav average for all of them with the exception of Montenegro where per capita investment was equal to that of Slovenia at 171 parcent of the YugoS-a1n Wverage. Kosovo was at the other extreme with invest- ment per capita at 52 percent of the country's average, while for Macedonia and Bosnia-Herzenvinn it rePnrPented thnt threP-foirths of the Yugoslav average. 65. It is obvious from the above observations that an historical short- age of investment resources was one major f fot groin eis- parity between the LDRs as a group and the DRs. This problem was particularly acute in Kosovo, whereas was c.LarLy IUt fortunate. HOwever, the investment ratios appear to be quite high for all LDRs and it is revealing to examine them in relationship to the investment pattern and the relative effi- ciency of the capital resource utilization in the LDRs, as expressed by the average capital-output ratios (COR) and the incremental capital-output ratios (ICOR). - J - Table 23: CAPITAL PRODUCTIVITY, 1961-71 SOCIAL SECTOR, ECNUUMIU ACTIVITIES (in constant 1966 prices) /1 /2 COR' ICOR-- Raoinn 1Q1 1966 1Q71 1Q1-66 1Q6-71 SFRY 2.3 2.4 2.5 2.4 2.7 o sn iaHerzegovina 3 2. 3.1 2. 30 U~ L~iJ.. %J &.7 * I G. V J.3 Montenegro 3.2 4.1 3.8 5.7 3.2 Macedonia2. 2. 2.2220 Kosovo 2.8 2.8 3.5 2.9 5.6 LDRs 2.9 2.8 3.0 2.8 3.2 Croatia 2.4 2.4 2.5 2.3 2.7 Slovenia 2.3 2.4 2.4 2.5 2.3 Serbia proper 1.9 2.0 2.2 2.2 2.6 Vojvodina 1.9 2.1 2.1 2.4 2.2 DRs 2.2 2.2 2.3 2.3 2.6 /1 Fixed assets divided by GMP. /2 The change in fixed assets divided by the -change in GMP in the respective period. Sources: Statistical Yearbook, Yugoslavia, 1974, Table 204-2. Studjije, Analize i Prikazi, No. 62, Yugoslavia. 1973. 66. A comparison of CORs and ICORs for the various regions of Yugoslavia for 1961-71 shows LDRs as a group to have systematically higher ratios of both parameters as compared to DRs. 1/ The ICORs were also higher for both de- e1lPd and lPs dPve1nPd regins in thp secn"d hAlf of he drcade as cnm- pared to the first. The higher ratios in the less developed regions as a group are to be partly explained in terms of their investment pattern. A greater proportion of investment in the LDRs is believed to have been chan- nelled into capitalinesv actviie such- asV1.= electri powe geneation mining, basic metallurgy and the provision of infrastructure. This was par- ticularly evident in the case of MOntenegro in the L.Lirst ILa.L. of the 1960's and Kosovo in the second half. The growth pattern of Bosnia-Herzegovina was 1/ The data relate to social sector economic activities and hence does not allow direct inferences regarding the relative capital productivity in the various regions. As this exc1ides private agriculture, which is a major sector in most LDRs and Serbia and which is also one of the least of DRs and LDRs is likely to be less pronounced for the economy as a whole. - 36 - also characterized by capital deepening and its ICOR in 1966-71 was signif- icantly above its 1966-71 level and the Yugoslav average. However, in con- trast to all other LDRs. Macedonia maintained very favorable ratios, for ICORs even lower than all DRs. This reflects its relatively less capital- intensive investment structure; the more diversified nature of its economy and manufacturing sector, and probably a somewhat more efficient pattern of resource allocations. 67. Another view to the average efficiency nd the Ahility to finance growth from internal accumulation can be taken by comparing average profit rates and average self-financing rateS. Tab. e 2T.: P rFT RATr AND CTVTNA\CTIr DATES, /1 1972 -(percentages of Yugoslav average) Profit Rate-i Self-Financing RateL Bosnia-Herzegovina 84 73 Montenegro 69 39 Macedonia 87 64 Kosova 57 45 LDTRs q 1 6T Croatia 100 115 Slovenia 133 151 Serbia proper 98 100 Vojvodina 102 112 TDRs10 117 /1 Economic activities, social sector. /2 Depreciation plus allocation to permanent enterprise funds as per- centage of fixed assets valued at purchase price. 13 Depreciation plus allocation to permanent enterprise funds as a percentage of realized investment in fixed assets. Sources: Statistical Yearbook, Yugoslavia, 1974, Table 217-1. Statistical Bulletin, Yugoslavia, 1973. While all less developed regions showed average profit rates well below the Yugoslav average of 12.9 percent, Macedonia clearly showed the most favorable result among them. As to the ability for self-financing of investment actual- ly carried out, the difference between developed and less developed regions is most pronounced. The latter as a group achieved less than two-thirds of the national average of 106 percent 1/, and Macedonia is about equal to the 1! The absolute figure may be questioned on methodological grounds (compare paragraph 104), but this should generally not affect the comparison hetween regions. average of the less developed regions. The differences of the self-financing ratios point tUo the afUL ntiUeLU policy of Yugoslavia to support the devel- opment of the less developed regions through transfers of funds for invest- ment, and the differences between the less developed regions indicate the degree to which they benefited from this transfer. 1/ 68. As mentioned before, sizeable transfers of resources are made to the less developed regions of Yugoslavia, both as budgetary grants (for social purposes) and as long-term loans (for economic investment). Estimated in- dicators are shown below: Table 25: ESTIMATED TRANSFERS TO THE LESS DEVELOPED REGIONS, /1 1972 Total transfers/ Loan transfers/ Total transfers/ GMP Investments Per capita (%) (%) (Din) Bosnia-Herzegovina 4.9 10.8 390 Montenegro 11.8 16.8 1,043 Macedonia 7.4 19.8 604 Kosovo 35.5 80.7 1,360 LDR. 9.0 21.2 658 /1 Both grants and loans are not reported actual data but imputed from the respecti.Ve -Formula for mobilization and diTstribution (A .L -. compare paragraphs 97 and 113 below); "loans" are net of self-contribution of the less de- veloped regions to the Federal FULLd. Source; Annex Table o. These estimates show that transfers do play an important role for Macedonia, particularly with respect to investment, although significantly less so .than for Kosovo--the poorest region of the Federation. 1.2 Macedonia in the Economy of Yugoslavia 69. In the absence of data on inter-regional trade flows, the economic role of individual regions can only be inferred from the relative size (in GMP terms) of the sectors producing largely exchangeable commodities (i.e. of industry, agriculture, and forestry) and of the branches within the industry sector 2/. The relative size can be viewed two ways, by looking at (a) the "relative-shares." (i.e. the share of output of the region in the output of 1/ Compare paragraphs 68 and 93. 2/ It is also possible to make some inferences by examining the contribu- tion of Macedonia to the supply of major commodities in Yugoslavia, see Annex Table 17. - 38 - Yugoslavia by sector and branch) or at (b) the "comparative structure" (i.e. the composition of output of each sectnr r hrnnrh, comparing thp region with the Yugoslav average). 70. For 1973 the commodity sectors compare as follows: Table 26: ROLE OF COMMODITY SECTOR OF MACEDONIA IN YUGOSLAVIA, 1973 (Percentages) Comparative Relative Share of Structure Sector SRM in Yugoslavia SRM SFRY industry 5.7 60.0 65.0 Agriculture and Forestry 7.1 40.0 35.0 Total Commodity Sectors 6.2 100.0 100.0 Total GMP 5.8 Source: Annex Tables 13 and 14. The figures show that Macedonia contributes a relatively larger share of agri- cultural output as compared to output of the industry sector in Yugoslavia. In terms of comparative structure, agriculture is also shown to constitute a greater proportion than the Yugoslav average. In terms of production volumes, Macedonia is almost the exclusive producer of cotton and rice and supplies a high proportion of tobacco, vegetables, table grapes and some other fruits. The forestry sector is small in Macedonia and the Republic may on balance be a net importer especially of wood varieties suitable for furniture making. 71. The corresponding analysis by bran-ch of indistry gives some further insight into the role of Macedonia in the Federation. A ranking of industry branches according to their relative share in the Yugoslm total appears hplow: - 38 - Yugoslavia by sector and branch) or at (b) the "comparative structure" (i.e. the composition of output of each sectnr r hrnnrh, comparing thp region with the Yugoslav average). 70. For 1973 the commodity sectors compare as follows: Table 26: ROLE OF COMMODITY SECTOR OF MACEDONIA IN YUGOSLAVIA, 1973 (Percentages) Comparative Relative Share of Structure Sector SRM in Yugoslavia SRM SFRY industry 5.7 60.0 65.0 Agriculture and Forestry 7.1 40.0 35.0 Total Commodity Sectors 6.2 100.0 100.0 Total GMP 5.8 Source: Annex Tables 13 and 14. The figures show that Macedonia contributes a relatively larger share of agri- cultural output as compared to output of the industry sector in Yugoslavia. In terms of comparative structure, agriculture is also shown to constitute a greater proportion than the Yugoslav average. In terms of production volumes, Macedonia is almost the exclusive producer of cotton and rice and supplies a high proportion of tobacco, vegetables, table grapes and some other fruits. The forestry sector is small in Macedonia and the Republic may on balance be a net importer especially of wood varieties suitable for furniture making. 71. The corresponding analysis by bran-ch of indistry gives some further insight into the role of Macedonia in the Federation. A ranking of industry branches according to their relative share in the Yugoslm total appears hplow: sector in the SRM as compared to that of the Federation is the relative diver- sificatioi of its industrial structure. The coefficient of specialization 1/ for Macedonian industry is calculated at 0.2765 which compares rather favor- ably with that of other regions of Yugoslavia. 72. The relative contribution of Macedonia to total Yugoslav exports by sector and major branches of industry appears in the table below: Table 28: ROLE OF MACEDONIA IN YUGOSLAV EXPORTS, 1973 (Percentages) Share Share of SRM in Sector in SRM1 Exports Yugoslav Exports Industry 93.2 6.0 of which: Tobacco and products 15.7 72.9 Non-ferrous metallurgy 15.4 7.5 Ferrous metallurgy 15.3 17.6 Textile products 13.4 8.5 Leather products 9.2 9.1 Metal 8.5 3.0 Chemical products 7.8 6.0 Agriculture 6.0 2.8 Forestry 0.8 2.9 Total Exports 100.0 5.5 Source: Statistical Yearbook, Yugoslavia, 1974, Tables 113-7, and 113-8. Statistical Yearbook, Macedonia, 1974, pp. 155-156. 1/ The coefficient measures the degree of specialization of manufactures in a given region with respect to different industry groups relative to all other regions. The value of the coefficient ranges between 0 and 1. It approaches unity if all the output in the region is concen- trated in a single industry and it comes to zero if a region has a pro- portional mix of industry identical to the entire country. The formula for the coefficient of specialization, S, may be expressed as follows: eij - zij where eij = output in industry i, in regiU j EJ r Ej Ej = total output in region j By far the largest proportion of Macedonia's exports is in the form of proc- essed and manufactured goods. Excluding tobacco processing which rather con- stitutes an export outlet for agriculture, the share of industry in total Macedonian exports would still amount to 77.5 percent but would fall below the share of industry in total Yugoslav exports. Other major exporting in- dustry branches were those of non-ferrous and ferrous metallurgy, textiles, leather, metal, and. chemical products. It is interesting in this regard to note the resemblance between the list of major industries in terms of output and export of Macedonia. For some of these industry branches which are rela- tively more labor intensive, such as textile products, leather products, and metal products--Macedonia also appears to have been quite successful in export vis-a-vis the rest of Yugoslavia. Agriculture, including livestock, accounted for 6 percent of total Macedonia's exports in 1973, yet constituted 12 percent of total Yugoslavia's agricultural exports. Most of the crop pro- duction, both in Macedonia and Yugoslavia as a whole, is destined for local consumption and the major export item is cattle. With respect to forestry, Macedonia contributed only marginally to the country's total exports of the sector. 73. The following table gives a breakdown of foreign trade by end use of products: Table 29: FOREIGN TRADE BY END USE, 1973 (in million Din and %) Exports Imports Relative Share Share Share Share Net Share of Net in in in in EXporL Exports in SRM Item SRM SFRY SRM SFRY SRIM SFRY Yugoslavia (%) (%) (%) (%) (M.Din) (M.Din) (%) Raw material and intermediate goods 50.7 53.1 68.4 62.2 -813 -22,018 3.7. Capital goods 6.2 13.6 17.8 22.3 -397 -10,447 3.8 Consumer goods 43.1 33.3 13.8 15.5 +716 + 4,270 16.8 Source: Statistical Yearbook, Yugoslavia, 1974, Tables 112-7, and 113-8. Statistical Yearbook, Macedonia, 1974, pp. 155-156. As the figures on exports, imports and net exports indicate, Macedonia exhib- its a comparative advantage in the production and export of consumer goods for which it contributed almost 17 percent of the net exports of the country in 1973. Both Yugoslavia and Macedonia are net importers of raw materials and intermediate and capital goods. Yet on balance, Macedonia appears at the present to have a somewhat higher comparative advantage in products of the former group relative to those of the latter. 1.3 The Characteristics of Macedonia's Growth The Growth of GNP and the Change in its Structural Composition 74. In relation to the Yugoslav economy Macedonia has achieved impres- sive growth rates over the past two decades. Between 1952 and 1973, its real GMP increased at an average annual compound rate of 8.3 percent as compared to an average rate of 7.6 percent for the country. Table 30: THE GROWTH OF GMP AND GMP PER CAPITA, 1952-73 (compound growth rates from three year average in constant 1966 prices) 192-6, 1960-70 1907 . 195- D4J ou I f_IU 17U I- 1*D41 GMP Total SRM 8.6 8.2 7.5 8.3 SFRY 9.4 6.7 5.8 7.6 GMP Per Capita SRM 7.5 6.5 5.8 6.8 SFRY 7.9 5.9 4.8 6.5 GMP Social Sector SRM 7.1 10.6 8.4 9.0 SFRY 10.0 8.2 6.2 8.6 GMP Individual Sector SRM 11.8 2.2 3.5 6.1 SFRY 8.2 2.5 3.6 4.8 /1 Growth rate between 1970/71 and 1972/73. source: Annex Table 18. The fiaiire aln indicate that the slowdown of the growth momentum in the 1960's and in recent years was less marked for Macedonia than for Yugoslavia as a whole. As a result of its growth performance, Macedonia gained an in- creasing share of the GMP of the country especially in the more recent years. The growth of real GMP' pe, capt' inMcdna huhafetdb t ea tively high rate of population growth between 1960 and 1973 was also above the Yugoslav average and per capita GMP incrae to-- - 73 percent f th cun try average in 1973 as compared to 68 percent in 1952. 1/ 1/ Assuming the actual growth of GMP of Macedonia between 1952 and 1973 was associated with a rate of population growth equal to that for Yugoslavia, real GMP per capita in the Republic could hypothetically have amounted to almost 78 percent of that for the country in 1973. -43 - 75. The growth process was, as in other regions of Yugoslavia, accom- panied by fundamental.structural changes with a decline in the relative share of the primary producing in favor of the secondary producing sectors. Start- ing with a higher share of agriculture and a lower share of industry than for total Yugoslavia in 1952, the process of change was also more dramatic in Macedonia, and the structure of its economy in 1973 approximated that of the country with some variations which reflect the particulars of its development strategy. Table 31: THE STRUCTURAL COMPOSITION AND GROWTH OF GMP, 1952-73 % Composition Annual Compound Growth 1)95 1973 Rate, 1952-73 Sector SRM SFRY SRM SFRY SRM SFRY Industry /1 15.0 22.0 39.2 37.3 13.6 10.5 Agriculture ,2 45.U 31.1 2.8 2U.7 5. L4.U Construction 11.3 10.6 8.5 9.1 6.7 6.4 Transport & Communications 5.5 6.5 6.2 7.7 6.9 8.5 Trade and Catering 16.6 16.5 16.5 19.9 8.3 8.6 Handicraft 6.0 7.3 4.4 4.9 6.8 5.8 Other - - 0.4 0.4 - - Total Economy 100.0 100.0 100.0 100.0 8.3 7.6 Social Sector 70.9 67.1 80.9 81.1 9.0 8.6 Individual Sector 29.1 32.9 19.1 18.9 6.1 4.8 /1 Including manufacturing, mining and quarrying. /2 Including fishery and forestry. Sources: Annex Table 18 and Statistical Yearbook, Yugoslavia, 1974, Table 105-4. 76. As compared to all Yugoslavia, the non-commodity producing sectors as a whole accounted in Macedonia for a lower share of GMP, a fact which re- flent its relativelv lower state of ennomic deuelnnment and the greater em- phasis on directly producing activities. As the figures also illustrate, all sprnrq ith thp Pv,rtpntrnn of trnQnnrt nind r-nmmiinirnn and trndp and catering grew faster in Macedonia than in the Yugoslav average. The differ- ence is pa,rticular,,ly evident n frthe industry sector, propel ng 4 i b 19Q73 -1gr -~ -_t~ - - - -- - -- j -_ to a higher share of GMP than for the country as a whole. There was also some acceleration Of industrial activity in the 1960'S and ear I qey 97's which was accompanied by concentration on the development of ferrous metal- lurgy and metal industries, chemical industries and construction .material industries. The growth rate of agriculture, though lagging behind the growth - 44- rates for all other sectors, exceeded the Yugoslav average and the share of the sector in total GMP was well above the average, reflecting a conscious policy of promoting agriculture. Employment. Labor Productivity and Labor Cost 77. The ratio of employment 1/ to population is a most significant de- velopment indicator for Yugoslavia. "Employment" basically measures the labor force ahorntinn of the snral sPrtnr, whPrP f-hP reduntinnf- or lnw-nrndcrtiVit-V labor of the agricultural sector eventually would have to move if the inter- regional, inta ad ia i m de a o be re- duced. The following table summarizes the employment situation in Macedonia and the country as a whole. T e UA Mp 'UOYT ^X?XM-Kr11 INDCATn ORS , MA30 1952C72 I D IL e J 3 2) ~ ~ Si LLZ~J~ IW'411 " LU.1%Z.L%j_1% I I (percentages) SRM SFRY SRM SFRY SRM SFRY Employment/population 7.0 10.3 14.6 17.7 17.4 20.3 Economic/total employment 79 83 82 84 82 83 Non-economic/total employment 21 17 18 16 18 17 Industry/economic employment 28 39 34 42 43 46 Industry/total employment 22 32 27 35 35 38 /1 By organization principle. Source: Annex Table 22. The employment ratio in Yugoslavia has increased over time consistent with the dynamic growth of the economy and the expansion of work opportunities in non- agricultural activities and especially industry. The progress of employment in Macedonia exceeded that of Yugoslavia as a whole, accompanied by a partic- ularly rapid increase in the share of industry. Further, in the process of development, the share of economic activities has by 1972 approached the Yugoslav average. In comparison with total Yugoslavia, however, the growth of Mceoni's empl-~7oment ra,tio, still lagedA be,hi~nd by alos a decade,~ reflec-ting greater labor redundancy in the rural sector and problems of open and disguised 1/ Employment" includes all salaried workers in both the social and the individual sectors. The latter component is, however, small and amounted to only 1.4 percent of the total employment in Macedonia in 1972. Em- ployment, thus, excludes the ''self-employed" in whatever economic sector. - 45 - 78. Employment grew by uneven rates, as shown below: Table 33: AVERAGE ANNUAL INCREMENTS OF EMPLOYMENT, 1952-72 1952-62 1962-67 1967-72 Total Growth Rate Total Growth Rate Total Growth Rate Economic activities of which: 9,980 9.2 3,240 1.8 10,260 5.0 Industry (3,740) (10.8) (3,920) (6.1) (4,920) (5.7) Non-economic activities 1,950 7.4 1,100 2.7 1,940 4.1 Total 11,9600 .. .2 2. 11,6l0 A.6 Source: Annex Table 22. Between 1952 and 1962, the average annual growth rate of 8.8 percent allowed the absorption of almost 12,000 new workers annually. The bulk of the increase was in employment in economic activities which also increased at a much higher rate than that of non-economic activities. Between 1962 and 1967 the employ- ment generation dropped drastically. Only thereafter, the employment growth picked up momentum again, and--at reduced annual rates--approximated the in- crements achieved during the 1950's. Industry persistently provided a fairly constant component of overall growth and equalized the slump which occurred in the mid-1960's in all other activities. 79. As to employment by sector, the comparison of Macedonia with total Yugoslavia shows close resemblance: - 46 - Table 34: EMPLOYMENT BY MAJOR BRANCH OF ECONOMIC ACTIVITY, 1972 (percentages) Sector SRM SFRY Tota-l Srial Sertor 100.0 100.0 Economic Activities 82.7 Industry /1 36.9 40.0 Agriculture /2 10.4 6.2 ons137 12, 9 Transport and communications 5.5 7.0 Trade and catering 130 1 Other /3 1.6 2.2 Non-Economic Activities 18.9 17.3 /1 Manufacturing, mining and quarrying. /2 Including forestry. /3 Handicrafts and communal services. Source: Annex Table 22. Industry was the largest employer in both Macedonia and Yugoslavia. Employ- ment in social sector agriculture was, however, somewhat higher in Macedonia than in the country as a whole reflecting the greater weight of agriculture in the former. 80. As indicated earlier, Macedonia's economy seems to be at a slight competitive disadvantage with respect to per unit labor costs. The following figures provide some hints on the relative competitiveness by sector in Macedonia as compared to the Federation: - 46 - Table 34: EMPLOYMENT BY MAJOR BRANCH OF ECONOMIC ACTIVITY, 1972 (percentages) Sector SRM SFRY Tota-l Srial Sertor 100.0 100.0 Economic Activities 82.7 Industry /1 36.9 40.0 Agriculture /2 10.4 6.2 ons137 12, 9 Transport and communications 5.5 7.0 Trade and catering 130 1 Other /3 1.6 2.2 Non-Economic Activities 18.9 17.3 /1 Manufacturing, mining and quarrying. /2 Including forestry. /3 Handicrafts and communal services. Source: Annex Table 22. Industry was the largest employer in both Macedonia and Yugoslavia. Employ- ment in social sector agriculture was, however, somewhat higher in Macedonia than in the country as a whole reflecting the greater weight of agriculture in the former. 80. As indicated earlier, Macedonia's economy seems to be at a slight competitive disadvantage with respect to per unit labor costs. The following figures provide some hints on the relative competitiveness by sector in Macedonia as compared to the Federation: - 1.8 - Table 36: TREND OF LABOR COMPETITIVENESS, 1962-72 /1 (Percentage of Yugoslav average, social sector) Average Net Average Workerst Unit Labor Year Workers' Income Productivity /2 Cost Total 1962 85 76 111 1965 85 82 104 1968 85 82 103 1970 84 77 109 1972 84 81 104 Industry 1962 85 80 106 1965 85 81 105 1968 86 85 101 1970 86 77 111 1972 87 86 101 /1 fOrganization principle. /2 Gross material product per worker. Source: Statistical Yearbook, Yugoslavia, 1974 Tables 204-9 and 205-1. 1.4 Investment and Capital Efficiency 82. The long-term view to investment is impeded by two statistical dif- ficulties: (a) long-term time series data do only exist for "cash transac- tions" which are conceptually ambiguous and report too low figures 1/, and (b) constant price time series do not exist beyond 1971. For purposes of con- sistency, therefore, general inferences regarding long-term investment trends would have to relate to cash transaction figures. The investment structure by realization principle is, nevertheless, examined for more recent years. 83. As the following figures indicate, Macedonia experienced a rapid expansion of investment over the past two decades both as a result of higher rates of internal accumulation and large transfers of investment resources from the Federation. 1/ See Annendix I. - 49 - Table 37: TRENnS OF TNVERTMENT 1990-70 (Cash transactions at constant 1966 prices) 1l50 190 1970 Ttua Investment ( Din C)SR I , 2 SFRY 8,836 19,624 34,571 E,CUnUMLUIToLa. Investment (%) SRM 70.0 73.3 67.2 SFRY 72.2 67.9 63.3 Industry/Total Investment (%) SRM 22.0 26.1 31.6 SFRY 30.5 29.8 27.4 Investment per capita (in Din) SRM 484 880 1,497 SFRY 541 1,066 1,697 Source: Neki Pokazatelji Razvoja Jugoslavije Socijalistickih Republika i Autonomnih Pokrajina, 1950-70 Yugoslavia, 1971. Average investment during the 1960's almost tripled against the level in the 1950's. There was also a strong and growing emphasis on economic activities and especially industry for Macedonia. Investment per capita in Macedonia similarly almost tripled during the 1960's, and it remained at about 88 per- cent of the Yugoslav average. 84. The distribution of realized investment for 1966-70 and 1971-73 by sector appears below: Table 38: THE STRUCTURE OF REALIZED INVESTMENT, 1966-73 (Social sector at current prices) 1966-70 1971-73 Average Annual Average Annual M. Din.-- % M. Din. % Industry and mining 980.7 43.8 1,541.6 39.7 Agriculture and forestry 255.5 11.4 476.8 12.3 Commodity sectors 1,236.2 55.2 2,018.4 52.0 Construction 105.0 4.7 188.2 4.9 Transport and communications 320.6 14.3 577.2 14.9 Trade and catpring 129.0 5.8 406.6 10.5 Handicrafts 8.0 0.4 50.1 1.3 Othr ecnoi- sctors 562.6 25.2 1,222.1 31.5 Total no-economic sectors /1 437.7 19.6 628.8 16.5 Total investment 2,236.5 100.0 3,879.3 100.0 /1 Including housing and communal activities. Source: Annex Table 27. The pattern of investment shown lends further support to the above observa- tions. The emphasis on industry, especially in the 1966-70 period, and other economic activities is evident and appears even higher than the data in Table 37 indicate. Notwithstanding possible variations in relative price changes among sectors, this may be explained in terms of conceptual differences between investment on payment "cash transactions" and actual or "realized" bases where the difficulties and omissions involved with cash transaction especially with respect to foreign credits is likely to be more relevant to investment in industry. The commodity sectors as a whole received over half of total investment, whereas the non-commodity sectors accounted for 25 percent in the 1966-70 period and was significantly higher in 1971-73, with transport and communications and trade and catering having the largest shares. Investment in non-economic activities accounted for an average of 18 percent in the 1966-73 period, but had a smaller share in the more recent years, though accompanied by notable rises in the field of education and culture, health and other social services. 85. In line with the growth and pattern of investment, the capital stock (fixed assets) has greatly increased over the past two decades. - 51 - Table 39: CAPITAL STOCK, 1952-70 (Social Sector in constant 1966 prices) 1952 1960 1965 1970 Total economy (in Din, M) SRM 2,158 4,803 8,300 12,519 SPRY 56,160 104,940 165,435 241,910 Share of industry (%) SRM 37 53 55 52 including power and mining SFRY 49 55 56 55 Tntl 'Fixed aets per worker (Din) SRI! 30,523 32,106 43,478 60,669 SFRY 39,081 42,060 53,905 75,644 Total Fixed assets per capita (Din) SRM 1,710 3,450 5,500 7,685 S 3,3 3 5,703 Q,13 11 Q75 Sources: Annex table 28 and Neki Pokazatelji Razvoja Jugoslavije Socijalis- tickih Republika i Autonomnih Pokrajina, 1950-70, Yugoslavia, 1971 and Materiajalni I Drustveni Razvoj, Yugoslavia, 1947-72. Fixed assets per worker kept pace with its growth for the country, and the capital labor ratio in Macedonia represented 80 percent of the Yugoslav aver- age in 1970. In terms of fixed assets per capita, the position of Macedonia has clearly improved in relative terms, but it still lagged behind signifi- cantly vis-a-vis the country as a whole. 86. The relationship between capital stock and CP and employment can be shown by the average and incremental captial/output and capital/labor ratios. - 52 - Table 40: AVERAGE AND INCREMENTAL CAPITAL OUTPUT AND CAPITAL LABOR RATIOS, 1952-70 (Social Sector, Economic Activities, at constant 1966 Prices) Total Other Economy Industry Economic SPM SFRY SRM SFRY SPI1 SFRY COR 1952 1.85 2.64 3.23 3.96 1.48 2.00 1960 2.38 2.27 3.37 302 1.79 1.74 1970 2.26 2.44 2.75 2.95 1.39 2.01 ICOR 1952-60 3.10 1.96 3.44 2.49 2.61 1.45 1 grn r n 1 0 1 CZ0 1) . A 1.a() 1 .01. 1) '1)7 r960 70 2.1 2.5 2.) 2.9 1.9 2.27) 1 CLR1 195 30. 39. /I 0V.0" 49.1 26r_U.8 32I.7 (ND '000) 1960 32.1 42.1 48.5 54.1 23.2 33.0 -,r r nr f ni 11 Cn I 'In r 19 70 ou.9 75.6 7.8 91.6 5. U 2.5 ou**- -)' '1y . 1CI C A - 10 7 _J ICLR 1952-603. 46.1 536 9. 1.3 3. (ND '000) 1960-70 137.7 194.8 118.2 196.9 166.3 192.4 Source: Annex table 28 and Neki Pokazatelji Razvoja Jugoslavije Socijalistickih Republika i Autonomnih Pokrajina, 1950-70, Yugoslavia, 1971 and Materiajalni i Drustveni Razvoj, Yugoslavia, 1947-72. On the whole, the pattern of capital allocation and its relative productivity and employment generating effects compares favorably with the Yugoslav aver- age. The scarcity of capital in the early 1950's and the small size of the industrial sector is reflected in the low overall COR for economic activities in 1952. The 1952-60 period was, however, characterized by capital deepening and large expansion of industrial investment with the effect that the ICOR for that period was almost 60 percent above that for the country and the COR in 1960 was significantly above the country's average for industry and slight- ly above it for the economy as a whole. After the 1960's the investment pattern shifted and both CORs and ICORs fell significantly below the Yugoslav average. The consistently lower CLRs and ICLRs show that the employment generating effect of investment was clearly more favorable in Macedonia. Particularly in r Macedonia has chnsp a more labor intensive growth path than the country as a whole. In view of the severe employment problems of Macedonia, the fact that it succeeded in creating pe-r1stently more addi- tional jobs per unit of investment constitutes a major achievement. 87. The structure of fixed assets by major sector is given belowt - 53 - Table 41: FIXED ASSETS BY MAJOR SECTOR, 1972 (Social sector, economic activities; in current prices) (%) Active Fixed Assets SRM SFRY Industry 52.1 50.6 Agriculture 12.0 6.9 Forestry 0.4 0.4 Construction 7.4 8.9 Transport and communication 16.7 18.6 Trade and tourism 8.6 11.6 Handicraft 1.1 0.9 Communal services 1.7 2.1 Total 100.0 100.0 Source: Annex- Tal5le 9. WY.LLLI the exceptL.L. of agricultuabr Macedonia--the structure of the existing capital stock is quite similar to that in Yugoslavia as a whole. However, Within the ind uri al (which accounts for about one-half of the total) there was greater concentra- tion in Macedonia in textiles, tobacco products, builuding materials, non- metal mineral products, leather products, electric energy, and ferrous metallurgy. 1/ 88. The measurement of "profitability" gives rise to numerous statisti- cal questions. "Profits" in the strict sense would be only the allocation from earned enterprise income, to the permanent funds of the enterprise. How- ever, the size of enterprise income is not independent from depreciation, and it is widely acknowledged that depreciation (at the legal minimum rates) is grossly insufficient for the replacement of fixed assets. Enterprises have a considerable degree of latitude to set aside a certain amount of savings by either choosing depreciation above the minimum rate, or by allocating to permanent funds a higher share of income than they are required by the income policy. In recognition of this fact, "accumulation"--largely synonymous to "profits"--is widely used two ways, "net" and "gross", the latter including depreciation. This report adopts the gross concept which obviously is more meaningful. The denominator of "profitability" is similarly ambiguous. As a matter of principle, "normal" working capital should be included but no useful statistical data are available. The denominator used in this report, 1/ Although the COR for the industrial sector as a whole was almost equal at 2.3 for Macedonia and Yugoslavia, it showed sone significant 7aria- tions among industry branches. (This is to be discussed at some greater length in Chapter D3.) - 54 - therefore, refers only to "fixed assets". Further, the data on fixed assets are probably to a considerable degree below replacement value due to insuf- ficient revaluation for inflation. For these reasons, the profitability shown below is probably higher than the rates would be if calculated on a more realistic basis. Table 42: PROFITABILITY BY SECTOR, 1972 (Social Sector, Economic Activities) Gross Profits Net Profits % of % of Yuzoslav Yugoslav Rate Average Rate Average Industry 10.0 76.3 4.2 61.8 Agriculture 8.5 85.9 4.5 84.9 Forestry 25.7 67.1 12.8 84.2 Construction 17.5 109-4 9.6 92.3 Transport and communication 7.6 115.2 0.8 88.9 Trade and tourism 25.1 111.6 20.7 119.7 Handicraft 11.5 70.1 3.9 35.5 Communal servics 6.3 110 5 3 1 9. Total 11.3 86l.9 5. 77.5r Source: Annex Table 29. 89. The gross profit rates, and even more so the net profit rates 1/ appear quite low for the major economic sectors. Except for trade and tourism, the net profit rates for all sectors were also below the Yugoslav average. In view of the importance of-the industrial sector, the relative shortfall in its net profitability is a matter of concern. 2/ There is likely to be no simple explanation to such relative lag in overall profitability in Macedonia. A number of factors may be cited, such as gestation period, infant industry problems, degree of transformation and fabrication of products, levels of technical and managerial skills, and technical know-how. Yet the fact remains that the economy of the Republic is still not able to generate sufficient net savings to finance its total investment needs. 1/ The differences between gross and net profit rates are the depreciation rates. 2/ The profitability rates for individual industries also did vary signifi- cantly from the Yugoslav average, see Chapter D3. - 55 - 2. Mobilization and Allocation of Financial Resources 2.1 Introduction 90. The principles of "decentralization" and "self-management" have changed drastically the role and the nature of public finance and fiscal pol- icy in Yugoslavia. During the era of central planning (1947-51) almost all resources were collected and allocated through the Federal Budget._ _The in- stitutional reforms, starting the 1950's and gaining _additional momentum after 1965, have changed this picture completely. Three major elements which have been embodied in the new Constitution can be isolated in this process of institutional change: (1) According to the principle of "decentralization", functions of "public finance"--collection of revenues as well as de- cisions on expenditures--have to the maximum possible degree been transferred to lower socio-political levels, i.e. from the Federation to the republics, and from the republics to the communes. (2) According to the principle of "self-management", numerous economic functinMs, which were previously the prerogative of the "state" (Federation, republics, communes), have been transferedtothed.onmy ..This shift too t ors (a) enterprises were, in conjunction with the banks, given theresonibiitytomobilize and to allocatCe the bulk of the resources pertaining to economic investment; (b) numerous autonomous self-manageud special funds were intite- o federal or regional basis in the area of economic infrastruc- ture (like roads, water). They collected resources from various sources and allocated them under some form of control by the contributors.. 1/ The prominent examples of special funds at present are the Federal Fund for the Less Developed Regions and the Republic Fund for the Less Developed Communes. (3) According to the principles of self-management, and "soli- darity", numerous social functions, like health and educa- tion which were previously the prerogative of the "state" have been transferred to "self-managed" "communities of interest", which collect the contributions and allocate 1/ With the added emphasis on self-management principles by the new Constitution, these are in turn being replaced by self-managed com- munities of interest parallel to those which have for some years been operative in the field of social service. - 56 - resources for both investment and current expenditures. As stated above 1/, communities of interest are also being introduced in all sectors including the economic realm on matters of general interest. 91. As a result, the budgets of the state (Federation, republics and communes) were progressively reduced in relative size and to the classical functions: to finance administration and defense, and to provide subsidies for current expenditures and non-economic investment to lower layers of the "state" and to the self-managed socio-political communities. On the re- source mobilization side, the revenues collected by the special funds and by the communities of interest are contractual obligations levied from enter- prises and citizens and are generally deducted out of enterprise and/or per- sonal incomes through a special mechanism. Similarly, the expenditures of these extra-budgetary units are not included in the budget. 92. A further difficulty is the fact that transitory budget transac- tions remain frequently uncounted. The most conspicuous case is the federal tax collected in the regions. For Macedonia for examnle. taxes in the amount of Din. 1.5 billion were collected and transferred to the Federation in 1975, but they do not appear under revenues or expenditures of the Republic budget. On the other hand, the grants received in the same year from the Federation are inrliidd in buh tairyn reuesP of t-he Rpnic.1iIr Tn t-he nrocess of Acn- tralization, many funds 2/ which were established to carry out functions pre- v- u te y e a a been replaced by communities of interest or have ceased to receive direct contributions, but some continue collecting annu4e ( which can be sizeable) from citsA f-previously granted. By virtue of recent legislation, accumulated resources of the state previously known as "1state capital1", are also being transferred to thne economy--hog rtn f of credits--in a gradual process to be completed in 1985. 93. Figures on investment financing are available only up to 1972 and related to the deficient concept of cash transactions. As shown in Annex Table 32 investment payments for 1971-72 represent an average of only 83 per- cent of actual or realized investment for the country as a whole. Notwith- standing the various conceptual difficulties and ambiguities, a comparison of the sources of financing of developed and less developed regions is most re- vealing of their relative capacities of self-financing investments. 1/ See also paragraph 15. 2/ For all of Yugoslavia the number of funds came reportedly to "several thousand". - 57 - Table 43: SOURCES OF FINANCING INVESTMENT, 1971-72 (percentages, social sector, cash transactions) Federation & Economic Other Social Organizations Banks Communities Other Bosnia-Herzegovina 32.4 36.4 17.3 13.9 Montenegro 11.7 0: 46.9 1.9 Macedonia 23.7 40.6 29.2 6.5 Kosovo 11.6 16.9 67.8 3.7 LDRs 24.5 35.4 31.1 9.0 DRs 40.2 50.*5 2.7 6.6 TOTAL 35.9 46.4 10.5 7.2 Source: Annex Table 32. Economic and other enterprises in the developed regions contributed almost twice as much towards the financing of investment in comparison to those in the less developed regions. Banks contributed proportionally higher shares of financing in the developed regions than in the less-developed regions re- flecting both the higher income levels and the greater role of banks in re- source mobilization in the former relative to the latter. The role of re- source transfers from the Federation and other socio-political communities in financing of investments in the LDRs is also evident as this component repre- sented about 31 percent of the total for 1971-72. 94. The pattern of investment financing was quite similar among devel- oped regions but varied significantly among the LDRs. Kosovo had by far the largest proportion of its investments financed by outside resources (means of the Federal Fund and other resources from socio-political communities) fol- lowed by Montenegro. Bosnia-Herzegovina, on the other hand, had to rely- largelv on its own resources while Macedonia approximated the average for the LDRs and had about 29 percent of means of financing from Federal and other snrIo-nnlitIral nmmunities and 41 percent from banks. The contribution of economic and other organizations to investment financing was the highest for Bosnia-Herzegovina followed by Macedonia- Kosovo and Montenegro- respectively. 95..4 T o g le givs n ovrview of the recenti atust,iq of budgets: LI A 5- budgets: ~ 58 - Table 44: MACEDONIA REPUBLIC AND COMMUNAL BUDGETS, 1973 Republic Communes Total M. Din. M. Din. M. Din. Revenues Contributions (income tax) 40.6, 304.6 345.2 15.0 Sales taxes (total) 1111.0 153.4 1264.4 54.7 Transfers Receipts from Socio- Political Organizations 366.0 221.0 587.0 25.4 Other 168.0 97.2 114.0 4.9 Total 1534.4 776.2 2310.6 100.0 Expenditures Education, cience, Ciltuir 63.6 159.6 223-2 9.7 Health, Welfare 65.4 61.9 127.3 5.5 Administration 197.5 349.9 547.4 23.7 Transfers to All Socio-Political Organizations /1 124 67.0 1190.4/1 51.6 Investment 29.8 2.5 32.2 1.4 Intervention in the Economy 20.5_ 6v.3J 6.8 . Other 32.6 86.2 118.8 5.2 Total 1532.8 773.4 2306.2 100.0 /1 Including contribution to the Federal Budget amounting to Din. 871.2 million. Source: Annex Tables 33, 34 .and 35. The share of budget resources in GMP in the early 1970's increased from 10.2 percent in 1970 to 15.8 percent in 1972, but dropped again to around 13 percent in 1973. This apparent rapid increase in the early 1970's is, however, to be explained in terms of the change in the form of contributions to the Federal Budget. Starting 1971, the major part of sales tax which was previously transferred to the Federal Budget is being retained by the Republic, and the Republic's contribution to the Federation was assessed on the basis of its share of the country's total GMP. Net of direct contributions to the Federal Budget, the average expenditure per capita in Macedonia amounted to Din. 842 in 1973 as compared to the Yugoslav average of Din. 1,070. 1/ If The reporting of budgetary figures for 1973 shown in the Statistical Yearbook of Yugoslavia, 1974, was not consistent for all regions. Whereas contributions to the Federal Budget were included in the totals for some of the regions of Yugoslavia, they were excluded for the others. Adjustments are therefore necessary for inter-regional comparisons. - 59 - 96. On the revenue side the Republic relies heavily on sales tax and the commune on incometax and sales tax. About 25 percent of total resources was received as transfers mostly from the federal budget. Income taxes are levied on incomes in the social sector and in the individual sector. Prior to 1974, income tax was levied exclusively on personal income collected by the enterprises; starting 1974, the income tax is split into two components namely tax on personal incomes fund and on enterprise income net of all obligations and payments for workers in the ratio of 60 percent and 40 percent respectively. This was introduced as a measure to encourage labor intensive activities and should have generally favorable effects on resource allocation and employment generation. In the individual sector each group is taxed according to a separate schedule specifying proportional rates for taxation. 1/ Contribution to the "communities of interest" are calculated similarly and collected jointly with proportional personal income tax. Although excluded from the budget rev- AnuR thpv arp from thp taxable subjects noint of view. nart of thp total income tax. Sales taxes are levied on the sales value of product at the etanil nr f4inl coaimnst4n" leal Thev c o a basic tax whIch is determined by Federal law plus additional Republic and communal tax components. The basic tax is at a rate of 12.5 percent 2/ of the sales value of all pro- ducts except alcohol, tobacco and petroleum which pay special taxes at much LhigherL rates0. LepUU.lian and communal sales taxes are uniform to prod u ct-6 s and are determined at the level of the respective socio-political community. in 1973, the Republican component was at the rate of 3.5 percent and the communal at the rate of 6 percent of the sales value of the product. With the changes in the form of contributions to the Federal Budget occurring in 1971 the relative share of the various components changed drastically. The share of sales tax increased from 16 percent in 1970 to 55 percent in 1973 and the share of the other revenues dropped accordingly. 97. A large revenue item in the Republic budget are grants from the federal budget. Such transfers took place for many years. But only recently was a systematic basis established for the determination of their size. - Beginning 1972, a total of 0.84 percent of the Yugoslav GMP (of the social sector) is to be transferred every year to the less developed regions as-a whole for the financing of social services and the amount is to be distri- buted as follows: Bosnia-Herzegovina 40 percent Kosovo 30 percent Macedonia 19 percent Montenegro 11 percent 1/ The tax base for agriculture is determined for average-income on the basis of land use classification. 2/ This rate was raised to 14 percent in May 1975 with the difference in proceeds being earmarked for special purpose funds to protect the standard of living. - %0V The reported total of Din. 366 million for Macedonia in 1973 approximates the amount computed through the transfer rule. These transfers amounted to around 2.1 percent of the GMP of the Republic. The transfer receipts of the communes are provided from the Republic budget. 98. On the expenditure side, the largest item is transfer to socio- political communities. This item increased rapidly from 23 percent in 1970 to 52 percent in 1973 mainly as a result of the inclusion of contributions to the Federal Budget starting 1971, 1/ and it accounts for more than two- thirds of the rapid expansion of 180 percent in total expenditure over the same period. Transfers to minor socio-political communities embrace a gamut of earmarked specific grants and subsidies with special rules each. Their common denominator is that they are for financing of the "social standard" (like health, education, welfare, housing) and that they are intended to equalize the differences between the communes. However, no information as to the breakdown could be obtained, and since they enter into numerous rPnrtPd And unrepnnrted budgets. no Dossibility exists to trace them on the recipient side. 2/ The shares of education and health appear quite small, but this is not representative. A large nortion of either is financed through the communities of interest outside the Republic or commune budgets. The same applies for non-economic invPtment which also apnear quite small. Economic investment out of budgetary resources is insignificant, below 0.5 percent of total expenditure. 99. The breakdown of the budgetary revenues and x and the features of major items bring out that the signficant rise in the ratio of budgets to QTMPL oes LUot i the "roe of . At the cnay, control by the administration has, if anything, declined recently, in line with the twin goal of "decentralization" and "self-management". As a coro-1 lary, the role of fiscal policy--the budgets of republics, autonomous prov- inces and communes account for about one-half of total public revenues and expenditures--as an active policy instrument with respect to growth, demand management and redistribution has declined somewhat. 2.3 Resource Mobilization of Enterprises 100. The resource generation of enterprises ("gross accumulation") is composed of "allocation to enterprise funds" equivalent to undistributed profits" and depreciation. The rules governing the determination of the first component underwent numerous changes in the course of time. In the last few years they have been gradually codified within the "income policy". It does not primarily aim--as the name seems to imply and as some features 1/ See paragraph 95. 2/ In this connection it is significant to note that the sum of reported budget revenues of the individual communes comes to Din. 1.18 billion for 1972 whereas the amount in Appendix Table 34--showing the reported aggregate for all communes--comes to only 683 million for the same year. - 61 - might suggest--at short-term management of the level of personal income and private consumption, but specifically at the long-term savings rate of the economy. The analytical principle is to include payments to workers into the residual "net income" of the enterprise (gross revenues minus all "legal and contractual obligations"). Accordingly, (net) accumulation targets and performance are cormonly expressed by the respective ratios of "gross personal income" and ,"accumulation" in "net income". The income policy does not re- gulate the ratins exnlir.itlv btut indirert1v through detPrmin1ng the maximum total amount of personal incomes which the enterprise is permitted to distri- bute among its o 101. The income policy 4s regrded as the cornerstone of the " self-management" principle. It rewards (or penalizes) the workers for success (o failurel) OL LLeir wor.ing organization, but on.Ly to a lMiJtL nU regLul ed degree. The rationale for restricting the right of the workers for com- plete autonomy 1in these matters is t VhLW ew L that -5tpeeL bUUc UL LC.LUIe of an enterprise are not exclusively the result of the contribution of the present collective of workers. They also reflect-the history and the total economic and social environment of the enterprise--like endowment with and the access to capital, technological and/or market dynamics, market position vis-a-vis suppliers and customers--which are beyond the control of the enter- prise. Therefore, society has a right-to participate in determining the ground rules for income distribution of enterprises through the social con- tracts on income policy. 102. Macedonia was aiming during the current Five-Year Plan at an average 70/30 ratio (70 percent personal income and 30 percent accumulation). The table below presents the approximate distribution by sector for 1972: Table 45: INCOMES POLICY: DISTRIBUTION AS FOR 1972 /1 (percentages) -Gross Personal Income Net Accumulation SRM SPRY/1 SFRY/2 SRM SFRY/1 SFRY/2 Industry 85 76 72 15 24 28 Agriculture 83 79 76 17 21 24 Forestry 87 87 84 13 13 16 Construction 85 82 78 15 18 22 Transport 93 94 83 7 6 17 Trade and catering 72 71 67 28 3G 33 Crafts 91 85 76 9 15 24 Communal Activities 73 68 72 27 32 28 Total Economy 83 79 73 17 21 27 /1 Computed as for Macedonia from data in Annex Table 29. /2 From Statistical Yearbook of Yugoslavia, 1974, Table 106-8. - 62 - The comparison of the two columns for Yugoslavia shows that the mission's computation somewhat overstates the ratio distributed to workers because of the omission of some minor elements in accumulation which cannot be identified statistically. Assuming a corresponding deviation for Macedonia, it is still apparent that the 70/30 target was optimistic and the realized ratio was probably in the order of 75/25 to 80/20. 103. In viewing the income distribution ratios, three aspects have to be kept in mind with respect to depreciation. First, mandatory depreciations, for which maximum periods (i.e. minimum rates) are regulated, are deducted orior to "net income" for distribution Voluntary dpnrPiation ahove t-he level minimum, which some enterprises choose to account, are part of "accumu- lat-Inn" fromn "n-t innome". Seco-nd, the minimum dpeai rates appea fairly low; for 1972 average depreciation comes to only 5.8 percent of the purchase value of active fixed assets in Maedoni. Thid, the purchase vanlue on which depreciation rates are based, are only to a very limited extent a dj1usted for infl1ation, and accumulated depreciation over the lif ti ' .% . .U .L .AUL.&=%me ofl the assets are generally far below replacement value. As a result, enter- prises with apparently favorable accumulation performance frequently need a sizeable injection of new credit whenever the depreciated assets have to be replaced--even if no significant expansion of capacity is involved. 1/ 104. The comparison of total gross enterprise resource mobilization-- depreciation and allocation to permanent enterprise funds, aggregated to "gross accumulation"--with realized investment, shows the following features: Table 46: RATIO OF ACCUMULATION TO REALIZED INVESMENT, 1972 (current prices, fixed assets, social sector, economic activities) SRM SFRJ SRM/SPRJ (%) TnA ustry (inc. power, m4nng) 67.9 10. In 63 Agriculture 45.4 99.1 45.8 Forestry 181.1 1 6V. 10.9 Construction 116.3 217.8 53.4 Transport and communications 51.9 50.2 103.4 Trade and tourism 93.8 158.7 59.1 Handicraft 58.8 118.5 49.6 Communal services 21.1 32.7 64.5 Total 68.2 106.1 64.3 Source: Annex Table 29. 1/ In addition, sinc interpt rates on crpedits aro negative in real terms, i.e. the interest rate on credits is below the inflation rate for pro- ductive fixed assets, even outwardly successful enterprise may une close scrutiny turn out to consume rather than to generate financial resources. - UJ - The ratios for Macedonia appear quite modest as compared to the surprisingly high ratios for Yugoslavia. In 1972, for example, aggregate savings of eco- nomic enterprises in the country's social sector economy exceeded total invest- ment in fixed assets. 1/ The ratios, therefore, might exaggerate somewhat the respective self-financing potential in absolute terms, but they are pro- bably a useful indicators as to relative differences in self-financing poten- tial. The lower self-financing potential of the economy of Macedonia which has been consistently apparent from previous analyses reflects two aspects: (a) lower profitability of the existing capital stock and (b) greater access to outside financing. 2.4 Banks 105. As a result of several mergers, Macedonia has now one big multi- purpose bank. the Stopanska Banka of Skople (SBS) 2/ which exists together with the National Bank of Macedonia and branches of other banks. 3/ SBS performs all banking functions, from mobilization of private savings to long-term financing of investment. In addition, it is the sole recipient of the Federal Fund loan,i and is in charge of their relending and administration. SBS also has for all practical purposes the role of a treasury for the Republic. SBS's o-atns4 ,a goerned by the board of I ts "fou-nders" which comprise all major economic enterprises of the Republic which hold long-term funds in SBS (they are, thus, simleuly "nnr"A nd1th majo-r bov-rnowexrs) a*ndl the- government. SBS therefore, holds a focal position in mobilization and alloc- ation of investment resources in accordance -with th4 el-aagmn1are ments and social contracts concluded by the economy and the priorities set up in the Plan of the Republic. 106. The policy of SBS is decided annually by the assembly of the found- ers. Since the founders are holding funds in SBS not as a financial invest- ment but as a means to participate in shaping SBS's lending policy, Lt business policy is generally directed towards the interest of borrowers rather than depositors. This is particularly evident in the interest rate policy. While the interest rates for relending of Federal Fund and Republic Fund resources are regulated by Republic law, 4/ SBS is autonomous in the determination of all other lending and borrowing rates. These rates, at an average of around 10-12 percent, were well below the recent rates of inflation. 1/ Net accumulation, however, includes some components which are not strictly available for investment. 2/ The Bank was first established in 1962 and existed together with two other Banks the Rmer-Investment Banks of Skopie and Bitola up to 1972. The three banks were then integrated to form the present Stopanska Banka of Skopje which has 22 branches all over the RepublIc and its Head Office in the capital Skopje. 3/ Namely, Yugo-Banka, Ljubljanska Banka, Yugoslav Investment Bank, yugoalav Investment Credit Bank, Agricultural Bank and others. 4/ Compare paragraph 113. - 64 - Borrowers, were subsidized (and depositors penalized) by a negative "real rate of interest" with possibly some adverse effects on the volume of savings.l/ 107. The structure of SBS's operations can be gleaned from the breakdown of resources and of the outstanding loans as at December 31, 1974: Table 47: SRS_ RESOURCES AND CREDITS OUTSTANDING (DECEMBER 31- 1974) (Million Dinar) Resources Demand deposits77.7 Time and savings deposits 6,801.6 - t4 Anq q Short-term borrowing 1,493.2 Loans: from Federal Funds and other socio-political communities 9,810.9 Banks and other 4,489.6 Own funds (founders, housing, reserves) 2,269.1 Total Resources 28,639.1 Credits Outstanding Working capital (short- and long-term) 10,609.2 Housing and communal construction 1,863.7 Other long-term loans and investments in fixed assets 16,166.2 Total Credits 28,639.1 Source: SBS. 108. On the resource side, demand, time and savings deposits comprise deposits of enterprises, socio-political organizations and private households and amounted to almost 37 percent of SBS total resources in 1974. Private savings play a major role; reportedly at And of 1974 they came to about Din. 5.2 billion, of which almost Din. 1.7 billion was from workers' remittances, i.e. in foren exchange. 2/ The two long-term loAn items Are ach A mitre of dissimilar components. The first contains loans which have to be repayed to the re spective creditors and an unknn but apparently sa 0le, sare of loans which have in the meantime been transformed into grants and are only ad- ministered by SBS For example, Federalu loans e n t 1971-7 pe riod are in the order of Din. 4.2 billion only, the balance of Din. 5.6 billion 1/ Compare Chapter E.2. 2/ For all Macedonia. private savings at end of 1974 amounted to Din. 6.9 billion of which Din. 4.4 billion was of local savings and Din. 2.5 billion eqmiuAlent in foreign exchange. are previous Federal Fund contributions which remain as grants with the Republic (although not-necessarily with SBS or the final recipients) and re- sources of the Republic Fund for Less Developed Communes. 109. On the credit side. working canital credits amounted to 37 nercent of total SBS. outstanding credits in 1974. Loans for housing and communal constructihn renrsnveA almost 7 nercent, whereas other inn-tearm loans and investments accounted for the remaining.56 percent. When the intended "dis- burdenig of t econmy" (. 4 wi-off of previous debt to t1he "lsta te"l or the Federation) is completed-, outstanding credits as well as resources would contract. 1/ Further, a considerable portion of the working capital credits is given on a long-term basis, is used for investment, and--in the course of Luture "disburdeniug" actions--transferred to permanent enterprise funds, i.e., written off (in the banks assets against write-offs in its liabilities). 110. The following data provides an illustration of the recent operations of SBS and its role in channelling resources for.investments in the Republic: Table 48: SBS, LOAN DISBURSMENTS AND SHARE IN INVESTMENTS FINANCING BY SECTOR, 1971-73 (for fixed assets, social sector) SBS Disbursements Realized Investments Shares of SBS M. Din. % M. Din. %% Industry 2,918 56.2 4,625 39.7 63 Agriculture and forestry 1,045 20.1 1,431 12.3 73 Construction 449 8.7 565 4.9 80 Transport and communication 16 0.3 1,731 14.9 1 Trade and tourism 433 8.3 1,220 10.5 36 Handicraft 86 1.7 150 1.3 57 Total Economic Sectors 4,947 95.3 9,722 83.5 51 Total Non-economic Sectors 244 4.7 1,916 16.5 13 Total 5,192 100.0 11,638 100.0 45 /1 SBS disbursements and realized investments do not completely match con- ceptually, the shares of SBS, therefore, can only give an approximation. Sources: Annex Table 27 and SBS, Annual Reports. 1/ Consistent with the decision taken by the Republic for the distribution of "state capital", in 1974 about Din. 900 million were transferred to enterprises. - 66 - As the figures indicate, about 56 percent of SBS loan disbursements in the 1971-73 period were channelled for long-term investment in industry and mining. Net in imnortance was azriculture- which accounted for one-fifth of loan disbursements, followed by construction and trade and tourism. The a11oction of the SBS investment resourre caPnPrallv followed the nattern of realized investments with two notable exceptions namely the transport and communications sect nd th l e non-econmic Sector aS a whole The Ativirty of the SBS was clearly concentrated on investment in economic activities. 111. In the above period, the SBS through its own resources, resources transferred through the Federal Fund and resource mobilizati4on from enter- prises and the population was thus able to finance almost one-half of actual social sector investments, with a higher ratio of financing for the economic investments as a whole and especially the construction, agriculture and indus- try sectors. 2.5 Special Development Funds 112. The transfer of resources for financing of investment (for economic and non-economic purposes) from developed to less developed regions has al- ways been the major policy in Yugoslavia to reduce the differences in the level of development. Initially, most of these transfers were affected through the federal budget and on ad hoc basis. After 1965 the transfers were to a growing degree collected and distributed outside the budgets and according to clearly defined rules. 1/ In the 1970's two major special development funds 2/ are relevant for Macedonia: (a) The Federal Fund for Less Developed Regions (b) Republic Fund for Less Developed Communes. In addition, transfers of budget grants were and still are taking place (for current expenditures and for non-economic investment), from the Federation to the Republic and the Communes, and from the Republic to the Communes. Since finant-ial rAqnnrrer are fungible to some degree, these grants had some impact as well on the size of resources available for economic investment. Federal Fund 113. The Federal Fund for Crediting the Accelerated Development of the L ess Developed Republics and Autonomous Provinces (Federal Fund) was founded in 1965 as the sole agency in charge of transferring resources for economic investment. Until 1971 the resources were given as grants to the eligible Republics. 3/ From 1971 onwards, the scheme was completely changed. Presently 1/ Less clear, however, is the basis for determination of these rules. For example, for the Federal Wund scheme the size of the "sacrifices" of the net contributing regions and of the "benefits" of the net recipient regions are not simpLY proPortional to pe ct i diff-entals 2/ See paragraph 97. 3/ In the recipient regions the resources were given as credits to individ- ual enterprises, with the annuities recirculated through the banks. - 67 - each Republic and Autonomous Province collects 1.94 percent of GMP of the social sector for the.Federal Fund in the form of compulsory loans (from social sector enterprises) in accordance with regulations issued by the collecting region. Of the collected resources, funds in the amount of 0.09-percent of Yugoslav GMP are passed on directly to Kosovo, and the remaining 1.85 percent are distributed as follows: Bosnia-Herzegovina 34 percent Kosovo 30 percent Macedonia 24 percent Montanegrn 12 percent The VaAarnl Vw1A Vaamlrno Ara mAAe AvAilnhla rn tha A1uthnri70Ad hnnka of recipient regions (SBS in Macedonia) at concessionary conditions: at an interest rate f A percent and reaym-n ove 15I years after 3 yas of grace (in case of Kosovo at an interest rate of 3 percent and over 18 years). 114. From the application of these rules to the reported 1972 1/ GMP and inVeU LL Uata results the folloWLn IpaCt Of the Federal Fund for Macedonia: Table 49: IMPACT OF THE FEDERAL FUND, ESTiATES FOR 1972 t'1 Obligations to Federal Fund 215 million Din. Claims to Federal Fund Gross 904 million Din. Net Claims to Federal Fund 689 million Din. Net Claims/GMP 5.0 percent Net Claims/Investment Expenditures (economic) 25.3 percent Net Claims/Investment Realization (economic) 19.8 percent Source: IBRD estimates on the basis of Federal Fund transfer mechanism rules applied to statistical data. As the figures suggest, the Federal Fund is presently a major source of in- vestment resources in Macedonia. The impact, however, is frequently somewhat over-rated. because attention is directed towards the "gross" contributions. while the obligations of Macedonia to the Federal Fund--which constitute a ain4-tav nn enterpr s nd reduce their a-rumuilntion potential--are dis- regarded. The impact of the Federal Fund will decrease over time, due to the built-in dynamics. Netcli payment of a1%fnrfnnuie will continue to grow by declining rates. But net claims after payments of annuities will start to decline at an accelerating rate after 1975 andA their ratio to GMP and investment will accordingly decrease. 1/ The last year for which figures on investment by both payments and realization concepts are available. - 68 - 115. The Federal Fund credits, however, have a specific feature which is frequently not fully perceived. Because of the difference between the highly concessionary terms at which they are accorded and the terms of "normal bank credits", they contain a high grant or subsidy element which accrues to the Republic. At the given terms of 4 percent interest rate, 15 years maturity and 3 years grace period, the grant element amounts to about 33 percent using a 10 percent discount rate and to 50 percent using a 15 percent discount rate 1/. To illustrate, it could be said that net transfers computed for 1972 of about Din. 700 million at Federal Fund terms is comparable to the case where one-third to one-half were given as a grant and the other share lent at the assumed nor- mal rate. These funds are relent to enterprises in the various sectors of the economy at differential terms according to special decisions. Industry, other than energy, rrive-d loans at 6-7 nerrnt interest rates and up to 10 years maturity period, while energy, agriculture and some other activities received creditsat much r inary terms. Denpending unnn their access to borrowing out of Federal Fund credits and the specific terms, enterprises were Y the same token subsidized to the extent that- their borrowin, terms are more concessionary than the normal terms. 2/ 116. Guidelines for the allocation of Federal Fund resources were set out w ith the objective of contributing tothefinacing ofcertan pstors and regions and for attracting additional resources to the Republic through other Yugoslav or foreign financing and joint ventures. For the Plan Period 1971-75 they were defined as follows: (a) 15 percent for investment in the energy sector for the con- struction of power stations and for the power transmission grid; (b) up to 5 percent for investment in labor intensive projects in industry and services; (c) 2 percent to be credited to the Republic Fund for less developed communes; (d) about 2 percent for the modernization of ZTP (The Railway and Transport Enterprise) and for the construction of the Gostivar- Kicevo railway; and (e) the remainder to be allocated by the Bank among the various sectors with priority for projects in industry, agriculture, transport and tourism which provide for the following: over 60 percent of additional financing from banks ani joinit labor organizations outside the Republic and from foreign sources, 1/ Even the 15 percent rate was quite modest under the high rates of infla- tion which had prevailed iL recent years. See Chapter E. 2. 2/ The importance of sound economic appraisal of projects should,therefore, be highlighted. Compare paragraphs 297-296. - 69 - - joint ventures with foreign partners which participation rate is to be at least 30 per- cent, - roads and other economic infrastructure projects which are covered at least 40 percent by foreign credits, . financed by the International-Bank for Recons- truction and Development. Republic Fund 117. In.order to reduce the differences in the level of development among the commune-s, Macedonila 4int4 tite i 1966 the Republican Fund fr thec Less Developed Communes (Republic Fund). For the present Plan period its t a ources a estimad at M about Din. 440 million pVided ou o- -f the Federal Fund transfers, which amounted to 2 percent of the total, and from Reubicnsources. These resources together with, other banks credits -A V-CJ~I L. LL1 ~ U LQQJU. L.=O IL-Pr,=LAL W .1 V1..JLL=A. UCJL&.'X ""% C. t Q A own participation amounted to about 14 percent. For the next Plan period a higher volume of transfer from Federal "Funxd resources to th1e RAepublic Fund may be envisaged. 118. The resources of the Republic Fund are earmarked for investment credits to be disbursed in the less developed communes. Five criteria deter- mine eligibility: (a) GMP per capita below 70 percent of the Republic aver- age; (b) ratio of social sector employment in population below 70 percent of the Republic average; (c) investment per capita below 70 percent of the Re- public average; (d) fixed assets per capita below 70 percent of the Republic average; and (e) GMP in industry per capita below 70 percent of the Republic average. A commune is considered eligible if it meets the first criterion and a weighted average of the other four. Presently, 14 1/ out of 30 com- munes of SRM are classified as "less developed" by these criteria. 119. The largest proportion of the Republic Fund resources is utilized for economic activities and almost 80 percent of its disbursed resources for the 1971-74 period was for investment in industry. Most of its other invest- ments, on the other hand, was in infrastructure and mainly roads. Credits for economic investment are administered and allocated by SBS and are all on credit basis; with an average interest rate of 4.5 percent and average repay- ment period of 14 years. Credits for non-economic investments are adminis- tered by the Republic Fund organization and are allocated by it in coopera- tion with communities of interest and communes. They are given as grants. 120. Credits from the Republican Fund for economic investment are to be civen mainly to song ente-rprise which are considrd "-arriers of 1 Tetovo,' Gtilva71, Kocevo, nrd Debar, Struga, Rs, Demi4 Hisar, Krushovo, Kratevo, Kriva Palanka, Berovo, Vinica and Radovish. - 70 - development". These credits are regularly pooled with other resources from the enterprises, the Federal Fund, banks and foreign means to finance invest- ments in less developed communes. For those projects in which the Republic Fund participated in the 1971-74 period, it contributed Din. 266 million, representing almoSt 18 nprrpnt of total investment value of Din. 1.483 mil- lion. Communities of Interest 121. "Communities of Interest" (also frequently called "associations") are self-managed institutions which collect and allocate resources for cur- rent operation and for investment in specific social services and in other activities. 1/ They are in principle organized on the communal level, but frequently comprise numerous communes. Their operations are directed by an elected assembly comprising delegates of contributions and recipients, which has a large degree of autonomy in determining fees and the use of collected means. The associations also participate in the decision on the use of re- sources made available for the specific purpose from communal, the Republic and the Federal budgets, although these generally do not enter the budgets of the associations. 3. Planning and Plan Realization 3.1 The Planning Process 122. The process of preparing the Social Plan in Macedonia is the same as the planning process elsewhere in Yugoslavia. It is essentially an itera- tive process of consensus finding and rests on the constitutional principles of "decentralization" and "self-management". At an initial stage and accord- ing to general guidelines established at the Republican level, tentative tar- gets are estimated on the basis of macro-economic analyses and studies. In parallel thp ernomir enternrises and the non-economic service organizations prepare their initial projections. These are then gradually adjusted against each other through "constt " which ge-nerally take place within the eco- nomic "associations" (of individual branches) and between associations with- in the Republican Chamber of Economy. Thereafter "cnsii1tatns" and "con- frontations" are extended to include the banks and socio-political communities, WithL the Planning InstitLute largelyopatginacodaigfuto. Once a "draft" has emerged, it is submitted to public discussion, and to dis- cussion and decision by the assemblies of the socio-polltical communities (Republic, communes). 1/ See paragraph 15. - 71 - 123. The stps for all practical nurpos are not clearly separable from each other, neither by scope, nor level nor in the sequence. Furthermore, at various stages the planning process for the Republic s t the planning process for the Federation (both have the same planning period), p aly- -Ath respect to t rpafr of F4nncial reo-urces and the develop- ment of national priority industries. This highly complex iterative process of deeopn a_-general consensus mong aldeso-mkg enite on _ desirable and feasible targets is not regulated by rigid procedural rules. It is pursued through a sequence of interlbocked discuss'-on and' decision- meetings which is determined.on an ad hoc basis as the process moves along. It IS probably fair to say that the planning process (i.e., the exchange of information and the search for consensus) is as important as its final pro- duct, the Plan. 3.2 The Social Development Plan 1971-75 Plan Objectives 124. By the end of 1966-70 Plan period and for the preparation of the 1971-75 Plan, the following major problems were identified: low per capita income as compared to the national average, lower degree of industrialization, high ratio of rural population, low employment ratio and large numbers of unemployed people, low fixed assets per capita, unsatisfactory levels of accumulation and monetary instability with rise in price and costs. These problems were, therefore, to be addressed to in' the current Plan. 125. Consistent with the national growth objective and the need to reduce regional income differentials the Plan for 1971-75 aimed at an average annual rate of growth of social product of 9.2 percent, exceeding the planned average Yu2oslav growth rate of 7.5 percent. Projecting a population growth of 1.4 percent per annum, this would have allowed the realization of a per capita rntinnn in,-nena nf abouiit Din_ 12,000 nr the qiivalent of $700 (in 1971 nrices) by the end of the Plan period--representing a growth rate of about 7.6 per- rnt. The development objective encompassed a faster growth of the social sector, 10.6 percent, as compared to the individual sector, 3.8 percent. In- vestment in the former was projected to grow nt nyl avrag rate nf 7.4 nprcent, t-. . J _ _ __ _ -__--__-. - , - r t _ e c n thus implying a favorable trend of capital/output ratio for the economy as a whole. W il resp ect - ---. to the- for es -Jee--n d t4ibutio_ Of the ocal prdA among competing ends the Plan envisaged a faster increase of accumulation than of consumption and a slowergrwth of real personal arn thn of i- come generated. The determination of ratios was, however, left to the enter- prises and organizatLIonS toV LrgulateM insl aagmn.gemet.Sca sector employment was projected to grow at a rate of 4 percent and labor productivity at a higher average rate of 6 percen per annumU, implying an improvement in relative labor competitiveness. 126. The rapid growth of the economy was also envisaged to be accompanied by dynamic structural change with major emphasis on industrialization. The social product in industry was projected to grow at a rate of 12.5 percent while that in agriculture at 4.5 percent, resulting in a higher share of in- dustry and lower share of agriculture in the social product. The proportion of active population in agriculture was also estimated to decline from almost 49 percent to 44 percent during the Plan period. Priorities within the var- ious sectors were defined as follows. In industry the emphasis was .to be on the development of electric power, basic metallurgy and metal products, elec- tric equipment and chemical products. With respect to light industries such as textiles, leather, tobacco and food processing, attention was to be geared towards improvement and modernization of production techniques, increasing the degree of finalization of production, and in textiles to move towards substitution of synthetic for natural fibers and to the production of ready wear. The industry sector was to account for 57.5 percent of total invest- ments. As compared to the 1966-70 Plan, investment in electric power was to be stepped up while that in basic metallurgy was to account for a significant- ly lower share. Larger shares of investments were also to go into the en- gineering, chemical and food processing industries. 127. Agriculture was envisaged to receive 15 percent of investment re- sources priorities being assigned to^ then 4mp-rovenm=nt ndA expanin of 4irrigJan- tion and drainage systems, livestock development, and an emphasis on fruits and vegetables growing and cattle feed. Special reference was also made to activating the large potential of the individual sector agriculture through the adoption of favorable credit*, organizational and marketing policies. 128. As compared to total LugoslaviA, a eatr PLUULLU V o LfVC*LenL. was to be channeled into the commodity sectors relative to the tertiary sec- tors. Within the latter, transport and communications was to account for the large share followed by trade and tourism. On account of its favorable foreign exchange and employment generating effects, the latter sector was to be propelled by large expansion in hotel accommodations and related facilities. 129. More than half of the total investment was expected to be financed through Federal Fund credits and other resources from the Federation, and from various means obtained from abroad. The implementation of the envisaged large projects, especially in-the field of basic metallurgy, energy, transport and communication and flood control and water use systems was linked to the availability of large foreign resources. Plan Implementation 130. During its visit to Macedonia in April 1975, the mission received some preliminary data on plan implementation. Table 50: RATIOS OF PLAN REALIZATION 1971-75 (estimated average realized as percentages of Plan target growth rates) /1 /1 Social Product Employment-- Investment- Industry 75 128 75 Agriculture 82 288 113 Forestry , 132 224 100 Construction 56 36 125 Transport and communications 91 90 83 Trade and catering 83 112 108 Handicrafts 126 100 100 Other economic activities 108 88/2 - Total economic activities 82 126 86 Total non-economic activities - 130 -73/2 TOTAL 125 83 /2 Including housing and communal services. Source: Republic Institute for Planning. The average annual realized growth rate of social product is estimated at 7.5 percent which, though respectable, is below the threshold of 8 percentL Lure- seen in the Plan as necessary to sustain the development dynamics of the economy. In conjunction with an estimated rate of population growth of 1.5 percent--slightly higher than the projected rate of 1.4 percent--the gain in per capita national income of 5.8 percent per annum was almost one-third be- low the envisaged growth target. In terms of relative growth achievement, the social sector as a whole has fared better than the individual sector. In- dustry is estimated to have grown by 9.4 percent, yet it fell below the plan- ned target by almost one-quarter. Within the industry sector, the shortfall in Plan realization was more pronounced for basic industries than for light industries. By far the largest deviation occured for electric energy (grow- ing by 2 percent as compared to a planned rate of 8 percent). Other industry branches for which the actual growth remained substantially below the target are the ferrous metallurgy, electric equipment industries, non-ferrous metal- lurgy and paper products. Conversely, the realized growth of the chemical industry and of a number of light industries, notably textiles, tobacco processing, building materials and miscellaneous manufacturers, exceeded the targets. 131. Agriculture grew at 3.7 percent well below-the target of 4.5 percent. For other sectors the highest growth rates were recorded for handicrafts and communal activities, followed by transport and communication and trade and tourism. The largest shortfall was in the field of construction where the ratin of realizedr grnwtrh is stimt-pd at only S6 perrpet. - 74 - 132. For investment, the estimated realization was also below the target by almost 17 percent and the largest shortfall was in the industry sector. Industrial investment is estimated to have grown by 7 percent per annum against a planned rate of 9 percent. For the whole Plan period, its share in total economic investments was correspondingly reduced from 58 percent to 50 percent. Within the industrial sector the most significant shortfalls occurred for electric energy, basic metallurgy, chemical industries and equipment and durable consumer goods industries, while the shares of textiles, leather and rubber industries, building materials and agricultural processing industries were significantly higher than anticipated. With respect to other sectors, the planned expansion of investments fell below the target for transport and communications and for non-economic activities. 133. With respect to employment, the growth target was surpassed by about one-quarter. Most of this higher labor absorption can be traced back to in- dustry, agriculture and non-economic activities. During the Plan period em- ployment is estimated to have grown by an average of 5 percent per year, allow- ing the engagement of about 71,000 additional workers. Given the slower than envisaged growth momentum of GMP, the rapid increase in employment was, however, accompanied by only a small average improvement in workers' productivity against the ambitious Plan target of 6 percent per annum. The lag may be partly attributable to structural effects, namely, the difference between the p1anned and realized structure of production, esneiallv within the indsitrv sector, and partly to overoptimistic assumptions on average workers' produc- tivity in each sector and activity. 134. The informntionn navailal is cleanrly insuiffice-nt to d-rnw tip n co-n plete picture of the growth dynamics of Macedonia in the above period. The above trends, nevertheless, suggest a high degree of interdependence. Starting from investment, the shortfall was probably a result of both lower internal ac- cuuation and smaller in flows of foreign resources. Since foreignfiacn cum:u.L L.UL ~LU c"4.LL I-LIOWS 04. 1.0.C4611 ~ ILI~ 1CU'.. LL.kL .LCLIL.L"rg was foreseen as a necessary condition for the implementation of large scale projects, its shortage appears to have had the greatest impact on investments in basic industries and transport and communications. A portion of domestic resources, which would have been otherwise tied in the above fields, was there- fore released for larger investment in light industries and other economic activities. The latter are relatively more labor-intensive and hence their higher than envisaged growth has resulted in a faster growth of employment. I/ However, since the average share of labor in output in these branches is also relatively high, the overall rise in average workers' productivity and GMP growth were accordingly affected. Further, given the close uniformity of workers renumeration, the rise in employment was also likely to have been ac- companied by a corresponding rise in gross personal incomes, leaving a reduced margin of the total GMP for accumulation. 1/ The rapid rise of employment was probably also a result of a conscious policy. A number of measures have been adopted during the Dlan period to encourage labor intensive activities. 3.3 The Social Development Plan 1976-80 135. The new Federal Constitution adopted in January 1974 establishes the iframe for more effeCtive niatio-UI deveUt:Velent p.LaUniLLg. LL LLIoUgH sLPeCL.L legislation was enacted in February 1976, basic features of the evolving planning procedure were already known. The Five-Year Plan 1976-80 for the country and regions will apply new principles of "self-management planning". As in the past, planning commences at the level of individual enterprises (working organizations) and proceeds in a unifying process of concensus find- ing. However, at the end of the planning process--which the socio-poiltical communities (government entities) join once an advanced stage of adjustment has been achieved--agreement will have been reached among all these "subjects" of planning on a consolidated program of action. These agreements will be quite specific. They will, in principle, contain for each economic sector a list of major investment projects to be undertaken, arrangements for special- ization and for physical deliveries of output, and provisions for financing. The agreements will be codified in the form of "social contracts" or "self- management agreements" which are mandatory for the whole Plan period, unless renegotiated in the case of major deviations occuring in the course of Plan implementation. 136. The role of the new Plan will thus deviate substantially from that of the previous Plan, and in more than one respect. It will not only be more specific, mandatory in principle, and subject to revision by an institutional- ized nrnPes nf renepotiatInn; it will als finteprate the nhvsical and the financial dimensions of the future course of action. Enterprises will be obliged to support, wtff+h4"n, nd acs eono1rmic ativtiesa nndl of regions,_ the physical programs through financing arrangements. As a corollary, banks--which wil b 11e under str onger control of the founding members-(te firmly committed through the agreements entered into by their founders, and will cons eq uentl1-y have signifi can tly reduced scope for autonomous action. W.L_ CLL VUL rL LLy La J ..L 1 ~4L.y A U Vlc-CI.L 1. I 6. - 0 is stil n. 137. The Soci D . --eveloprment Plan for Mcedonia 1976-80 is sll ude preparation, and it is expected to be completed and to be presented to the Republican Assembly for discussion and adoption in mid-1976. The contours of the Plan appear to be already well defined however. Insights into the foreseen path and orientation of the development process over the coming five years were from a preliminary draft made available to the mission and through discussions with officials during the mission's visit. 138. In global terms the forthcoming Social Development Plan aims to achieve an overall annual growth rate of social product of 8-9 percent, 1/ about equal to the rate envisaged tor the present Plan. Given the estimated ratio of realization of the 1971-75 Plan and the present balance of payments constraints for the country as a whole, this rate of growth is probably some- what optimistic. Social sector employment is estimated to grow by 4.5 percent 1/ With rates of 9-10 percent for the social sector, 10-11 percent for industry and 4.5 percent for agriculture. - 76 - per annum which- if realized, would be hardly sufficipnt to absorb the ex- pected natural increase in the labor force. The investment ratio is envis- aged to rise to abot noe-tohird of GMP With nlmost 70 percent of totl f4axed asset investments for economic activities. Of total fixed asset economic in- vestments, indust-y is foreseen to account for 59 percent, agriculture 14 percent, transport and communications 13 percent, and trade and tourism 8 percent. 1 LL L A.n pLLL. f. tLe industrial sector appear to be largely identified and coincide to a large degree with the priorities established at the national level. The emphasis on investment in basic industry, which was particularly apparent in the 1966-70 Plan, was somewhat toned down in the 1971-75 Plan and even more so in the course of Plan implementation. As a result, the 1971-75 industrial investment and production structure proved favorable in terms of employment generation, and the industry sector absorbed almost three times as much additional workers as under the preceding Plan. The rise in (ZP was also higher and entailed a somewhat more favorable growth of agriculture. The accent for 1976-80 seems to be again on basic industries. Given the more binding nature of the new Plan and the greater role of enter- prises in the mobilization and allocation of investment resources, the Plan priorities will probably more closely be adhered to. 140. In discussions with the mission it was noted that provisions were being made in the Plan, ensuring that the bulk of local and Federal Fund re- sources will not be preempted into basic industries at the expense of process- ing industries. 1/ About one-third of total envisaged investments in energy and up to 70 percent of investments in a number of basic industries would be financed from foreign resources. However, with the overall limits on the amounts of foreign borrowing established at the National and Republican levels, this is likely to leave only a small margin of foreign borrowing for investment in other industries. The further expansion of processing industries would, therefore, depend upon the total availability of domestic resources. This makes the emphasis in the Plan on resource mobilization all the important. For if due to a lack of resources, the light industries were to be reduced to a secondary role, a major feature of Macedonia's favorable pattern of development vis-a-vis other les dpUplonped regons WoTld h in jeopardy and the employment target would be difficult to attain. 1/ For details see paragraphs 228-231. D. ECONOMIC AND SOCIO-ECONOMIC SECTORS 1. Agriculture 1.1 Overview 141. The role of the agricultural sector.of Macedonia within the economy of the Republic and in comparison with the agricultural sector of the-Federa- tion is highlighted by the following major indicators: Table 51: INDICATORS OF THE AGRICULTURAL SECTOR, 1974 Agricultural land, percent of Yugoslavia 9.2 Cultivated land, percent of Yugoslavia 6.6 GMP, percent of total Macedonia 23.0 GZP, peraent of agriculture Yugoslavia 7.3 Resident labor force percent of Macedonia (1971) 44.0 Agri ciltiiral p nin, perent nf Macedonia (1971) 39.9 Source: Statistical Yearbook, 1974. The agricultural sector is as a share of GMP, considerably larger than in the Yugoslav average of 18.3 percent and it is only exceeded in Vojvodina (34.5 percent). For the resident labor force, the share was almost equal to Yugoslav average and similarly was the share of agricultural population. 1.2 Physical Conditions 142. Climatically two zones can be distinguished. The eastern and the central part of Macedonia has a mediterranean climate with mild winters and dry and hot summers. Average rainfall is mostly in the range of 450 to 600 mm per year, with a high proportion during the autumn and winter months. Tempera- ture, rainfall and rainfall distribution vary in wide ranges between years. In dry years, which may occur once in every 2-3 years, almost no precipitation occurs from June to August, temperatures reach an average of 300C and humidity falls below 50 percent. The northern and the western part have a continental climate with hot summers and cold winters, and average rainfall in the lowlands is between 600 to 900 mm per year and exceeds 1,000 mm in the mountainous areas. Both climatic zones are significantly influenced by orographic effects. An average vertical temperature gradient of -0.5*C per 100 meters of elevation has been reported. 143. Another major physical factor is the topography. Plains and valleys suitable for cultivation make up hardly more than one-quarter of the total surface of Macedonia. If sufficient water--rainfall and, as a rule, irriga- tion during the summer-is available, soil and climilatic conditions are favor- able for intensive agriculture with high yields. The remainder of the sur- face is mountainous, with steep slopes, heavy soils and karst. On these areas, in combination with the hot and dry summers, the only agricultural use is for low yielding pastures which at the margin are indistinguishable from barren land and/or shrubby forests without commercial value. The agri- cultural sector of Macedonia has, accordingly "dual" features, characterized by extensive mountain farming oriented towards livestock and intensive low- land farming. 144. The major zone of intensive agricultural use--accounting for about one-sixth of the cultivated surface of Macedonia--is the.Pelagonia Plain, extending from Prilep west and south to Bitola and the Greek border. Other areas of intensive agricultural use are the upper Vardar valley around Tetovo (in the northwest), the Skopje--Kumanovo basin of the rivers Vardar and Pcinju (in the north), the Bregalinica valley around Stip (in the east), the Strumica basin (in the southeast), and the lower Vardar river valley (north of the Greek border). Generally, all narrow river valleys are under intensive agricultural use. 1/ 1.3 Orientation of Land Use and Production 145. The land use pattern brings out the impact of the physical conditions. Table 52: LAND USE, 1973 (peretas nf surface) Macedonia SFRJ Total Surface Agricultural land in total surface 51.9 56.7 Cultivated land in total surface 25.9 39.5 Arable land in agricultural land'265. .,LU± LLU Lii d~LUL J. .L LU 44 QJu Pastures in agricultural land 50.2 30.3 Agricultural land 100 100 Cereals 49.3 64.9 Industrial crops 12.1 5.9 Vegetables 9.9 8.8 Fodder crops 5.1 11.6 Gardens, fallows, unused 23.6 8.8 Source: Annex Table 36. 1/ The overview map and special Annex Maps 8 to 14 give a more detailed view to the spatial characteristics of the agricultural sector. - 79 - The combination of a higher share of pastures in agricultural land with a high incidence of "marginal" pastures probably reduces the share of agricul- tural land in total surface further than shown above. Conversely, the share of cultivated land in total surface is probably a superior indicator for total used agricultural land; the comparison (26 percent of Macedonia versus 40 percent of Yugoslavia) demonstrates the impact of the adverse physical condi- tions. The pattern of use of arable land is somewhat ambiguous in Macedonia because of the high share of the residual category with diverse characteris- tics. The evidence suggests that fallow constitute a sizeable portion in this category and are a corollary of extensive crop rotation on marginally productive non-irrigated land. 146. The comparative advantags- and dndvanage of Mn,An-a w.4th respect to specific crops, as indicated by the respective yields, are shown below: Table.53: YIELDS OF MA OR CROPS (ArVRAGE OF 1972/73) 100 kg/ha Macdona SRYfacedonia/fRY_- (%). Taheat 205 26.6 81 Maize 19.7 34 58 Riceton Only Macedonia (4. Rice (48.3 Tobacco 11.2 11.5 97 Sugar beets 358 400 90 Sunflower 17.8 11.0 162 Cabagge 157.0 115.3 137 Tomatoes 196.7 112.3 175 Paprika 147.8 92.3 160 Apples/1 33.5 20.5 163 Grapes 63.2 51.6 122 Milk/2 909 1235 74 /1 Per tree. /2 Liter per cow per year. Source: Statistical Yearbook Yugoslavia, 1974, Tables 206-7, 206-19. Macedonia is clearly superior in the cultivation of vegetables, fruits and grapes, (which are mostly grown in irrigated land) and it falls below the Yugoslav average for cereals (except for rice which is exclusively grown in Macedonia). The comparative advantages of the above average yield crops are even greater than the physical yield data suggest. Due to the favorable con- di-tinq siz shares nf the tobarcn f-ruit- and vpetahp cron are of ahove average quality and/or appear early in the season on the market and, thus, command a premium price. This is particularly evident for tomatoes and table - 80l - grapes. The comDarison of the yield data with those on land use indicate that Land use tends to be in accordance with the comparative advantages. 147. Production and marketing orientation of Macedonian agriculture differ signficantly from the Yugoslav average. Items for which Macedonia plays a particularly large or small role are shown below: Table 54: PRODUCTION AND MARKET PRODUCTION, 1973 (Macedonia, as percentage of total Yugoslavia) Production /1 Market Production /2 Total 8.7 Cereals 3.5 6.8 rice 100 100 Industrial crops 19.9 tobacco 49.2 54.4 cotton 100 100 Vegetables 19.9 tomatoes 27.7 57.0 paprika 35.1 30.7 Fruits 20.2 apples 17 19.3 tale grapes n.a. 62.3 Sheep: meat 22.0 35.0 wool 21.0 32.9 /1 From physical output. 4. From value of sales through organized markets, see para 24 below. Source: Annex Tble 7. These shares reflect the orientation of land use and the comparative advan- tages and show the emphasis on: (a) intensive crops (vegetables, fruit, tobacco, rice) in the lowlands with sufficient availability of water (irrigation); (b) extensive use of the permanent grassland for sheep raising in the mountainous areas; and (c) extensive use (low yields and high shares of fallows) in the arid (non-irrigated) lowlands. 148. The comparison of the shares of total production with those of market production (i.e. of output purchased by and marketed through social sector enterprises) points to two particular features of agriculture in Macedonia. First, the Republic has developed an export position (vis-a-vis other parts of the country and abroad) for the products of specialization, like tobacco, rice, tomatoes, table grapes and wine etc. The only efficient marketing channel is the social sector, and the individual sector has to a large degree adjusted to this condition. Second, the social sector has de- veloped in production a relatively strong specialization with respect to wheat growing, sugar beet, yineyards and orchards. The table below gives further evidence of the orientation of marketed output% Table 55: SHARES IN TOTAL MARKET PRODUCTION, 1973 (Percentage of total market production) Macedonia SFRY Cereals 13.7 17.6 wheat (6.9) (9.0) rice (2-3) (0.2) Industrial crops 25.9 11.4 tbco(22.0) (3.5) Vegetables 7.3 3.2 tomatoes (2.9) (0. A Livestock 30.7 52.2 mutton/La,b f(9.0 () I Fruit 14.0 6.1 /0 r_\ /I) 0\ grapes (.5) (2.8) apples (3.1) (1.4) Wine '4.5 2.9 Other 3.9 9.8 Total 100 100 Source: Statistical Yearbook.Yugoslavia, 1974, Tables 212-17. 1.4 Growth of Production 149. The agricultural sector grew in Macedonia at significantly higher rates than the Yugoslav average. Table 56: GROWTH RATES OF PRODUCTION: TOTAL: 1966-73 (from 3 year averages) Macedonia Yugoslavia Production index, total 3.8 2.2 GMP, total 3.9 2.7 Social sector 7.8 (est.) 5.5 Individual sector 1.8 (est.) 1.8 Sources: Statistical Yearbook of Yugoslavia, 197L, Tles 105;-2, 203-1, 206-3. - 82 - 150. For major crops the trends differ substantially from each other. Table 57: GROWTH OF ACREAGE AND PRODUCTION, 1966-73 (from 3 years averages. 1965-67 = 100) Acreage Production Wheat 91.4 95 Maiz 95 118 Cotton 117 115 Rice 139 146 Tobacco 87 102 Sunflower 19624 Tomatoes 155 158 Pepper 162 192 Apples 147/1 205 Grapes 112 145 /1 Number of trees. Sources: Annex Tables 38, 39, 40, 41, 42. Annual fluctuations invalidate the apparent trends of production for wheat, tobacco and cotton. Positive production trends are evident only for those crops for which total acreage increased, and for which the increase of pro- duction exceeded the increase of acreage. The-direction of the change in output mix (and land use) is roughly in line with the changes in relative advantages, resulting from changes in output prices and progress of produc- tion technique; this combination of factors probably explains the particular- ly favorable growth of the agricultural sector of Macedonia. 151. For livestock and livestock products few significant trends can be observed. - 83 - Table 58: GROWTH OF LIVESTOCK AND LIVESTOCK PRODUCTS- 1967-73 (from 3 year averages, 1966-68 = 100) Ct1e (stock) 95 (beef) 101 (milk) 105 Pi.8gs ( stock) 1141 \ \ L.J N M, I f-t (pork) 103 OIeep (stock) 00 (mutton/lamb) 111 (wool) 90 Poultry (stock) 188 (broilers) 221 (eggs) 352 Meat, total 110 Source: Annex Tables 41, 42. Total meat production increased by an average rate of barely 2 percent per year, mostly due to the increasing production of broilers. Production of eggs grew by almost 30 percent per year, while production of milk stagnated. 152. The stocks of cattle and cows fluctuated within wide margins with- out a clear trend. In 1973, the individual sector accounted for about 95 percent of all cows. About one-half of the stock was of the Busha type, a native race with low milk yields (usually around 800 kg per cow) and low meat producing potential. About 20 percent were pure breeds (Frisians, Montafons or Simmental) or F 3/ F 4 cross breed between Bushas and one of. these races. Another 30 percent were cross breeds (F 1/ F 2) between Busha and one of the aforementioned races. The government tries to improve the stock in two ways: (a) artffirial in-sPminatin- (at nresent about 25 nprcent of all cows in the individual sector) (b) supply of or subsidy for "community bulls" (at present abo0ut 25 percent of all cows In the individAl eto) ~urth er, ine" ore oke ult efrs from, eal"luhtrn,te exten- SL.LL=J., .L&L UL"CL LW M=- LUCL..LL.Y LL.ae =.UIL ~L.Ly MJ_CU6LL_LL46,L "ML CAL-LJ sion service supports and subsidies as selective heifer raising program. The success of these programs is a presently serious impeded by the deficient infrastructure and low fodder production. Due to the scarcity of collection points, farmers frequently find no market outlets for milk, (which also ex- plains the stagnating milk production) and have consequently little incentive for the improvement of livestock and the expansion of fodder production. The government is aware of these difficulties and hopes to initiate some improve- ments with the assistance of the IBRD within the framework of the agricultural credit line project. - 84 - 153. In the social sector most cows are kept in large dairy farms. About 70 percent of the stock (about 7,600 in 1973) is of the Frisians race, 20 percent -a.-re MontafonS -and 10 percent are Simment_alS. S4nce S4mment nl nnr apparently not too well adapted to the climatic conditions in Macedonia (contraril1y to the northern republi.1cs)N, 4thei-r numbeor is grdull reucd N.)~ L.J ~ L. & & L LL I L 1LLI £1 J ULA . I -It .L U ; is grak uua..Ly Leu ced. Average milk yield in the social sector was 3.750 kg per cow in 1974, which J nn _1C ~ -1 - - Is satisfying taking into account tilat aUUL 0 percent U all cUws were IU the first lactation. 154. The stock of sheep declined by almost.20 percent between its peak in 1968 and 1973. 1/ The major problem associated with sheep raising is the availability of winter fodder, between November and arch/April. Two solu- tions for the winter feeding problem are presently used. First, social sector farms, and individual farmers with herds larger than about 200 sheep and with no or little arable land, use to wander their herds to winter pas- tures mainly in the middle and southern part of the Vardar Valley. In this case usually some additional fodder (mostly provided as concentrates on the winter pastures) is needed. Second, individual farmers with smaller herds and sufficient arable land use to grow winter fodder (fodder crops and/or hay from meadows) and to buy some additional concentrates as forage. 155. The capacity of the summer pastures is not yet comDletely utilized, particularly in the western mountains of the Republic, where higher precipa- tation and relatively high himidity-v wuld fciltt snTn improvnment of pastures. Both summer and winter pastures were until recently mostly held by social sector kombinats or the communes and usually received little if any care. They are now largely being transferred to "communities of interest" 2/ for the management of pastures. They assign the use of pastures and charge I.JL LLI - &- L_ J L A.14 L L * O .t t IL A ~ '4 - A.- - 11- .IaL. user fees for fertilization and improvement. Presently individual farmers and s oc-ial1 secto rs en ter-u-rises pay 13-1 5 DI-nar p er shIeep f or the us e ofI the summer pasture and 8 Dinar for the.use of the winter pasture. 156. More than 90 percent of the total stock of sheeo.(1.81 million in 1973) are owned by individual farmers. Most of their stock belongs to the local Pramenka breed of low productivity (1-1.2 kg wool per animal, 25-30.kg milk per lactation, the average slaughtering weight below 20 kg). The fertility rate is low with about 90-95 lambs per 100 ewes. 'The average size of the herd in the individual sector is about 100 to 150 ewes, but some privately owned herds come to 500 heads or more. For the improvement of stock the government has set up breding centers for rams which are sold at subsidized prices to selected farmers. This genetic upgrading, mainly through Bulgarian races (PlowdivFka in the plains and Zlatushka in the mountains) is expected to improve meat, milk and wool produc ing potential). 1/ See Annex Table 41. 2/ Compare paragraph 15. 157. The stock of pigs fluctuated without recognizable trend between 1963 and 1973 and increasad marked1v only in 1974. Pigs play a minor role (less than 20 percent of total meat production in 1973), mainly due to climatic rnnditinns anrid tnraditinns. Abnut 75 percent of t-1e stock was hA by individual farmers in 1973. Poultry was the most dynamic enterprise in livestock pouto The stock Increased persistently by hIgh rates (about 30 percent per year). The social sector took the lead in this expansion and its. shr i. the tal nueUL icLLreaLIL sdr 20V percent in 1963 to 55 perce in 1973, and a good part of the expansion in the individual sector takes place in cooperation with LI socL sector. 1 .5 inputs and Productivity 158. The total use of land for agriculture declined slightly over the last decade, accompanied by some reorientation of land use. Table 59: CHANGES OF LAND USE, 1963-73 (1963 100) Agricultural land 95 Orchards 112 vineyards 121 Meadows 96 r% r Pastures 9 Source: Statistical Yearbook, Macedonia. These figures suggest that the loss of agricultural land is due to abandoning of some marginal Pastures, to the increasing land needs for settlements on account of cultivated land and to increase idleness of non-irrigated low quality arable land. In addition, some arable land was converted to more high yielding land use. 159. Irrigation is becoming an important input for agriculture in Macedonia. Table 60: IRRIGATED LAND 1965 1970 1973 ToLa. Lrrigated land, Iuki 11a 3 50.0 62.6 Share of sprinkler irrigation (percent of total) 17 17 27 Source: Statistical Yearbook, Macedonia, 1974 Secretariat for Agriculture By 1973, the irrigated area accounted for almost 10 percent ot total cultivat- ed land. An additional 30,000 hectares are presently converted to irrigation. Sprinkler irrigation gained continuously importance but was still restricted to 27 percent of the total irrigated area. Fourty-four percent of the irriga- ted land belonged to the social sector. The distribution of irrigation by categories of use is shown below: Table 61: DISTRIBUTION OF IRRIGATED LAND, 1973 Irrigated in Hectares Percent Category (%) Arable land 48.5 77.5 8.5 Orchards 5.7 9.1 30.0 Vineyards 5.5 8.8 19.6 Meadows 2.9 4.6 Tot.l CtiHvnte Tad 626 100.0 9.4 Source: Statistical Yearbook Macedonia, 1974 160. Labor force and population in agriculture declined continuously. Table 62: AGRICULTURAL POPULATION AND LABOR FORCE /in ,0A0) Rate of Decline (%) 1953 1971 1975 (est) 1971 1953-75 Agricultural population 801 657 590 -1.1 -1.4 Agricultural labor force 358 278 260 -1.4 -1.4 Source: Annex Table 45. These figures point to a sizeable shift of the factor proportions. While in 1953 agricultural land per active was 4.4 hectare at the average, the ratio increased to about 5.1 hectare by 1974. 1/ 161. The consumption of fertilizer has increased slightly since 1965, and the share-of Macedonia in total consumption remained stable at about 4 percent 1/ For private sector agriculture, however, the land/labor ratio has actually der-lined between the two yearse - 87 - of the Yugoslav total. This translates into an intensity of use (kilogram per hectare of arable land) of less than two-thirds of the Yugoslav average of 260 kg/ha (in 1973). As to active contents, about 26 kg N, 14 kg P20S and 15 kg K205 have been used per hectare of arable land in 1973, giving a total of 55 kg per hectare in Macedonia as compared to 96 kg per hectare for all Yugoslavia. Fertilization of pastures, however, was practically zero. More than 50 percent of total consumption is accounted for by the social sector. 162. Ninety thousand horses were kept in Macedonia in 1974 (1 per 6 ha of arable land, compared to 1 per 7.8 ha in the average'of the Federation); their number remained practically unchanged since 1963. In addition, some 75,000-100,000 working cows, oxen and buffalos are being used. The number of tractors increased but at a much slower rate as elsewhere in Yugoslavia. Tale 63: NTMrR OF TRAC.TORS 1q1-73 Macedonia SFRY Macedonia SFRY ------- number ------ -----16 =in0---- 1 9 6 3 3779 1 10 0In J U jUJL .J J ' 1VU IULI 1973 5,729 120,487 187 336 Social Sector 2,698 95;,57 n.a. n.a. Individuals 3,031 24,911 n.a. n.a. Source: Statistical Yearbook Yugoslavia, Tables 206-27. In 1973, one tractor was available per 116 hectares of cultivated land in Macedonia, compared to 83 hectares in the average of the Federation. The social sector accounted for 47 percent of all tractors, and it used one tractor per 49 hectares, whereas the individual had one tractor for each 176 hectares. 163. The growth rate of production and the decrease of the labor input added up to an average growth rate of productivity of labor of about 5 per- cent per year. The average level of the labor productivity (social product per active person) reached about 95 percent of the Yugoslav average in 1971. - 88 - Table 64: PRODUCTIVITY IN AGRICULTURE, 1971 Ma,cedonia SFRY M.s_A0,.4 I'Z7V (' Agricultural land/worker /1 (hectare) 4.9 3.7 132 Cultivated land/worker/1 (hectare) 2.4 2.6 92 Social product/worker/1 (Dinar) 8,536 9,021 95 Social product/agricultural/2 land (Din./ha) 1,778 2,427 73 Soc-ial product/cultivahl/2 Land (Din./ha) 3,579 3,507 102 /1 Worker: active persons in agriculture according to census 1971. /2 1972. Sources: A nnex Tabl 'Les 36, 45. Statistical Yearbook Yugoslavia 1973, Table 204-5. The average productivity of land (in value terms) was considerably lower than Ln the Federiain for all agricultuXal land. HoweVer, the igh incience of arid pastures of low productivity within Macedonia distort the comparison. The productivity computed on the basis of cultivated land was slightly above the Yugoslav average. 1.6 Marketing, Prices and Consumption 164. Like elsewhere in Yugoslavia, "organized" markets with "authorized purchases" by social sector enterprises at or above "minimum prices" exist side-by-side with "informal" markets, where the peasants sell directly to consumers. The importance of the organized..markets is relatively high in Macedonia because of the orientation of large parts of the individual sec- tor's production to delivery to other parts of Yugoslavia or to exports. Table 65: PRODUCTION AND MARKET PRODUCTION OF THE INDIVIDUAL SECTOR 1967-73 (1967 = 100) 1971 1973 Wheat production 84 83 market production 141 205 Tnmatoes nrodrcti on 162 190 market production 194 236 Pepppr production 160 183 market production 345 241 Sheep stocks 125 132 market production 140 169 - 89 - However, for sales to other Republics, the individual sector does not exclu- sivelV rely on the social sector. Ind4 Vi dual farmers or infornnal Vrous - individual farmers ship significant quantities (specially of early vegetables) directly to local markets of Larger cities in the IULLILL RePUUL. 165. Responsibility for the agricultural price policy rests on ageLmIts between all members of the Federation. Three types of pricing arrangements are presently in force: (a) minimum prices are applied for cereals (rice,-wheat, maize), meat, wool and cotton, which are guaranteed for purchase commitments of the government: (b) minimum prices without purchasing guarantee of the govern- ment, mainly for products which need further processing such as milk, sugar beets, sunflower, tobacco and other industrial crops; 1/ and (c) unregulated prices for perishable products like vegetables and fruits which are sold on the informal peasant markets or through retail store chains. 166. The comparison of the evolution of prices of agricultural outputs and inputs shows an improving situation of the agricultural sector. Table 66: PRICE INDICES FOR AGRICULTURAL OUTPUTS AND INPUTS (Yuolalvia, 1965 = 100) 1970 1973 Agricultural output total 136 266 cereals 1-16 196 vegetables .1035 fruits 106 273 animl pro duuction J6 32 Agricultural inputs agricultural machines 111 150 chemicals for use in agriculture 122 177 building material 143 2U all investment and intermediary goods 113 159 Sources: Annex Tables 46, 47. This improvement of the terms ot trade of agriculture is proably even more significant for Macedonia because of its special orientation of production. 1/ However, once a marketing contract is made between the social sector and individual producers, it is binding as to obligation to purchase. - 90 - 167. Data from a survey of rural households (see Appendix Table 48) and estimates for total avyerage per can4tn cnsump t4n (cce Apncnd,i Tabjle LQ) indicates surprising differences between Macedonia and the Yugoslavia average. MIaced oni.a has--probably for a vari4 ety of econom iC, cultural and cimat icO reasons--significantly lower consumption in meat, animal fat, eggs, sugar and mi.L.N 100. lly e data on inter-regional trade flows are not availab.Le .te comparison of production data and consumption estimates suggests some hypo- theses on overall balances: (a) Macedonia produces a sizeable surplus of vegetables, apples, table grapes, wine, tobacco, rice and eggs; (b) there exists a significant deficit with respect to milk, cereals (except rice), and sugar; and (c) consumption and production are about balanced for meat, as a whole, but there is a surplus of mutton/lamb and a deficit of beef. 1.7 Organization of the Agricultural Sector Overview 169. In Macedonia--as in Yugoslavia as a whole--the individual sector dominates in agriculture. Table 67: RESPECTIVE ROLES OF THE INDIVIDUAL AND THE SOCIAL SECTOR, 1973 (relative shars: total agriculture = 100) Macedonia SFRY Individual Soia IndijviuAii ri1 Culttearea 80 20 86 14 70 30 77 23 Miark,et production 55.555 -5 Labor force (1971) 91.2 8.2 95.2 4.8 Sources: Annex Tables 36, 50. Statistical Yearbook of Yugoslavia, 1974, Tables 202-5, 204-5 Statistical Bulletin No. 767 The data presented in Appendix Table 50 show in great detail the respective roles of the two sectors for numerous crops and products. The distribution of labor between the social and the individual sector--i.e. the respective output mixes--reflect in the view of the mission quite well the respective - 91 - comparative advantages. The social sector, which holds in general land of higher quality and in large plots, and which has easy access to financing of equipment. is concentrated on cereals and industrial crops. The individual sector is--for its marketed output--oriented towards vegetable, fruits, live- stock and poultry. For labor-intensive cash crops (like tobacco, tomatoes, potatoes, beans, peppers, onions) production has shifted more and more to the in-Airdn1 Sptcnr ind thp role of the social sector is now negligible. SO-cial Sector 1 70. The social sector covers a variety of organizations These oresent- ly include agro-industrial kombinats, basic organizations of associated labor, agricultural cooperati-ves =an - o erknnry sta- tions and research stations. Recently "associations" have been founded which are groups of individual farmers and for which the classification is not quite clear (see para. 183). The two dominant social organizations are the kombinats and the cooperatives. As elsewhere in Yugoslavia, the number of independent organizations has drastically declined over the last decade through successive integration into larger units. A new major integration move is now under way through the integration of the 12 most important kombinats into ZIKM1 (United Agro-Industrial Kombinat " Macedonia). The most important research institutes are also members of ZIKM. 171. A kombinat is usually a vertically integrated enterprise. A typical kombinat is engaged in crop, vegetable, fruit and livestock production. t may process vegetables, livestock, wine, and other produce from its own pro- duction and purchase from other social enterprises or from the individual sector. It frequently operates retail outlets in nearby cities and towns and, if its output is large enough, throughout the country, and it may be active in direct exports. The cooperatives, on the other hand, may differ according to mode and size of operation. Larger independent cooperatives supplv factor inputs and services to cooperants (individual farmers) and in addition, cultivate own land and maintain their own livestock and crop pro- duction. Within kombinats there could also be units for cooperation with the purpose of handling the contractual arrangements with individual farmers. Other conperatives function as independent rural trade organizations which buy and sell products and manufactured inputs from and to individual farmers. 172. As this description indicates, enterprises in the social sector are frequently of the "r or' "aro-husinpss" tve. The respective roles of activities can be gleaned from the data below for GMP and employment. ishMet" corresponds to " ultu proe", ndicating that only 76 percent of the GMP of the social sector of agriculture comes from primary production. 1/ Cooperative units could also exist in agro-industrial kombinats an basic organizations of associated labor. Under the new Constitution, farmers who have pooled their labor and resources iu an agricultural cooperative would participate in the decisions of the unit and share in the distribution of its income. - 92 - Table 68: ACTIVITIES IN THE SOCIAL SECTOR, 1972 GMP Employment (in M. Din) (in 1000) APriculture by "organization principle"/1 1,237 30.5 Agriculture by "establishment principle"M 941 25.9 /1 Comparo Annpncli T for ri.qriq.qon of thp- statfstical concents. Sources: Statistical Yearbook, Yugoslavia, 1Q74_ Tahle 204-9, 1973- Tahle 203-2. Statistical Bulletin No. 830. 173. The overall performance of the social sector agriculture was im- pressive. The Secretariat for Agriculture has calculated for the period 1965 to 1973 an average growth rate of 7-8 percent. The growth of the index or production come even to an average rate above 9 percent. Like elsewhere in the country, the social sector in Macedonia emphasized capital intensive production. However, Table 169 shows significant differences. Table 69: COPOSITION OF MARKET PRODUCTION OF THE SOCIAL SECTOR, 1973 (percent of total) Macedonia SFRY Grain 20.5 27.1 Industrial crops 6.8 10.5 Vegetables 3.6 1.9 Fruit 20.4 7.0 (Apples)- (5.8) (2.8) (Grapes) (10.4) (3.4) Livestock 6.6 24.0 Alcoholic beverages 11.2 5.9 Milk 6.7 7.3 Eggs and poultry 20.3 10.1 Others 3.9 6.2 Source: Sttt YParb1o Yiigoslavia 1974,. Tables 212-19. The social sector in Macedonia has adjusta itq ountpu mix- tn the snpcial natural conditions, indicated by the high shares of fruits, vegetables and alcoho.L.ic Ueverages (predominantly -wie) I I'+ LU dUU . L.LL LJ j LJ U L1 LL L.C A. -- -- - 174. In additiJon to producing ente-.prises, tesca etricue self-managed service organizations, like veterinary stations, extension ser- vice and research stations. In 1973 Macedonia had 60 veterinary stations with 174 veterinarians and 257 technicians. They are responsible for the h ! 2一X へハ /A KU 1 一＼りド ハ／’へ・ ／、り／又k -‘一 ＼又可一ぐX ～トハ _＼り k\ \- ＼×～ーノ - 93. general health service and for the artificial insemination under the guidance of the institute for Livestock breeding. in principle they are to operate on self-financing basis, but may receive budgetary growth for special services like the control of diseases. 175. In 1971 Macedonia formed an agricultural extension service for the individual sector. Each commune has an independent extension station with 2-4 university graduated experts. About one-half of the financing is provid- ed each by the communes and by the Republic budgets. The working programs of the stations are prepared by the communes and approved by the Republic govern- ment. Major purpose of the extension service is the improvement of the produc- tion technique on individual farms, the introduction of new varieties, and the improvement of breeds (in Cooperation with the veterinary service and the institute for livestock breeding). Local experiments, demonstrations and individual advise, usually on reauest. are the major m P-thods to reanh the farmers. The extension service dvise's the individual farmers also with the Drenaration of rrprlit- nnnlirations fnr imnrnvPmPni- nrncrrn _ Q-nei to be submitted to social sector kombinats or banks. In addition, the Rpnuhlir Co--U ity stations through supply of information, technical assistance, exchange of experiences, and preparation 176. Reese arcLL is Wargan"Ized in tAhree major each cons iz) &_.LLi6 of several specialized institutes or divisions. The institutions receive ZU 3_5 percent of their financial needs from the government for basic research, the remainder is collected as fees for contract work for social sector enterprises. The institute of livestock_.breeding employs 26 University g.raduates; its major task is the improvement of-livestock breeding and feed- ing.. The artificial insemination program and the program for the improvement of sheep races by breeding and distribution of rams are major activities at present. The Veterinary institute is mainly restricted to research and ser- vice in the medical field. The Agricultural Research Institut _- is a comolex organization which has separate departments or institutes for each of the major crops, and for irrigation. It employs 45 University graduates. The main office is located in Skopje, but special institutes and experimental stations are located in various places. The most important and the oldest specialized institute is the Institute for Tobacco Research in Prilep. Other areas of research are cotton, rice, vineyards and fruit. Individual Sector 177. The individual agricultural sector consists of sli--htlv more than 160,000 farms holding about 530,000 hectares of cultivated land (in 1973). The individual held land decreased by about 100.000 hectares since 1961 and the number of farms slightly. so that the size of the average farm decreased from 3.8 to 3.3 hectare. About 3.6 persons lived on the average individual farm: one person was Supported by 0.9 hectare of cultivated lands and 1 active person worked on 2 hAnt1rP_ of rtiltivat-pd ln-nd- Thp _qi-7p rliqt-rilhiii-in-n i.Q -jprv unfavorable with a large number of farms below subsistence level. Table 70: SIZE DISTRIBUTION OF INDIVIDUAL FARMS. 1969 Percentage Percentage of Size (cultivated land)/1 of farms Cultivated land below 1 ha 37.6 5.7 1 - 2 ha 20.1 12.2 2 - 3 ha 13.8 14.1 3 - 5 ha 15.0 23.7 5 ha 13.5 44.3 /1 Exclusive of pastures which are mostly used for sheep raising. Source: Statiscal Bulletin No. 725, Survey of Agricultural Holdings of In- dividual Farmers, 1969, Belgrade, 1972. The problem ofl small size of the total holding is freque-ntl iyravtPe further by the scattered distribution of the total holding. 178. Income, productivity and yields in the 4ndividual sector are low in comparison with the social sector. 1 / rTn 71:V COS TOF nIM Pr)n1TrOTUTT V AMT VTTTT 1972/73 L.Lv.Lua.l Syocia.l I iual/ Sector Sector Social (%) GMP per worker/1 (Dinar) 8,411 36,387 23 GMP/ha cultivated area/1 (Dinar) 3,981 7,103 55 Wheat 100 kg/ha/2 18.4 28.3 65 Milk kg/cowl2 900 3,600 25 /1 1972. 7- 1973. Sources: Annex Table 36. Statistical Yearbook Yugoslavia 1974, Tables 202-5, 204-5 Statistical Bulletin No. 830 Major reasons for the lower performance of the individual sector, as discuss- Pd olsewhere, are: (a) generally lower quality of land; 1/ These differences are at the root of intra-regional and inter-regional income disparities. Compare paragraphs 47 and 48. - 95 - (b) lower share of irrigated land; (c) lower fertilizer input; (d) inferior varieties (of plants) and races (of livestock); (e) inferior mechanization; and (f) small farm size and scattered holdings. With the exception of the distribution of land (by quality) all these major factors can in principle be improved to some degree. The recent foundation of an extension service is a step in the right direction to mobilize this potential. To become successful, however, it would have to be supported by complementary measures like credits, improvement of the infrastructure, and expansion of irrigation. 179. The poverty in the individual sector is less grave.than suggested by Tables 20 and 21. The share of non-agricultural income in cash income earnekd by rural households has irasP d c-onsidr3hIv and is rPnnrted to amount to more than 50 percent in 1972 in the average of a sample-of 250 fn-m 1/ Table 72: CA'E OV OFF-PARM TrnM TI TOTAT CASH TmCOrmE OF AGRICULTURAL HOUSEHOLDS (,percent of total income)/ 1963 35 1968 56 1972 52 Source: Statistical-Yearbook Yugoslavia 1974. Tables 206-30. However, these averages cannot be generalized mainly because of the unevetn distribution of land by area and quality, irripation, and of the differences in access to off-farm work opportunities. The income situation can more realistically be assessed in qualitative terms by distinguishinR certain typical cases of "pure" farms (without alternative sources of income): (a) lowland farms with irrigated land; the income in this group is satisfactory compared with the average income in the Republic if the irrigated land amounts to at least 2 hectares and is used for intensive crops like early 1/ However, there are some indications that the sample data imply a systematic bias in favor of off-farm income. vegetables, tobacco and fruit. If some of the land is non-irrigated, the total land requirement for sufficient income is larger, depending on the respective ratios and the potential use. (b) farms with orchards and vineyards; Z-3 hectares provide a satisfactory income in many parts of the Republic even with limited irrigation: (c) farms without access to irrigation and no possibilities for intensive cultivation of fruits, vegetables and tobacco; the income situation in this category is general- ly very unsatisfactory unless the farm size is at least 5 hectares of cultivated land and/or if the farmers have access to pastures permitting a sizeable herd of sheep. 180. An important question in connection with the size of distribution of agricultural holdings and the income situation-is the size of rural under- ernnloyment.- Because of the wide variety of conditions an accurate assessment based on technical and economic indicators is impossible. The problem is, of rourse, verv much the focus of attention of Yugoslav experts. They believe, on the basis of the methods unknown to the mission, that the present agricul- tural output could be achieved without major investment by a rural labor force of 200,000 instead of the presently active 260,000. Thus, the present n deremployment -oulA tsa a ze r-ppti4y oncts Jimto an irnp-nlnVment of about 60,000. At opportunity costs corresponding to average earnings in other sectors, and in combination witszabe,nesmet the impute la bor- surplus would be probably at least twice as high especially if one takes into account that inl thi.s- case pouton would not- be mannt-ai -e o a-t of the non-irrigated land. Intersectoral Relations 181. Cooperation between the social and the individual sector takes place though trade, joint production and services. Trade in inputs and pro- ducts is the most important relation. It has gained importance in recent years mainly because of the growing specialization of the individual sector towards exports (to other parts of Yugoslavia and abroad) of vegetables, tobacco and fruit. 182. Contract for joint production is the most intensive form of coopera- tion. The social sector enterprises generally supply: (a) current inputs, like seeds and feed; (b) breeding stock, like sows, farrows, calves, etc; (c) extension and veterinary services; (d) crPrHts for new buildings or for the transformation of existing buildings. In turn, the social sector enterprises determine in considerable detail the production technique, especially in harvesting and drying of toba-o bre- ing and fattening of pigs and calves, production of broilers and eggs, and to alesser deg-ree in mi4k producti..Lon. Most k ombinats have set up sp ei a uits for cooperation. Cooperation is 100 percent for tobacco, sunflower and sugar beets 80 percent for rice and table and wine grapes and varies SiLgnificant- ly for other products. 183. To counteract this development and to mobilize the potential for productivity increase (e.g. yields of wheat and maize are about 40 percent higher under cooperation agreements than without), the Republic has passed a law for the formation of "associations" (Dogovorne Zajednica) according to proposals from the Green Plan. The Macedonian law foresees 3 types of asso- ciations: (a) "Agreements"; they are to organize mainly common investment and use of agricultural machinery in groups of 5-10 peasants. Agreements need no formal registration and have no special administration. (b) YCooperatives": Cooperatives comprise at least 15 peasants for the additional purpose of coordinating production plans. However there is no obligation to cooperate with the total production or to cooperate for an unlimited time. The means of production, especially land and buildings, remain the individual property of the members. 1/ (c) Membership of individual farmers in cooperative units of socil sctnr kmMn=ts a-nd zadrugis. The membership is achieved usually by contract cooperation in which the coorerators submit to production and land use plannIng by the kombinat, in exchange for equal status with the full memlbers of the kombinats. No experience exist yet with these new forms and wIth the respose of indi- vidual farmers to these new options. 1.8 Issues of Future Development 184. Given the present relative size of the individual sector--account- ing for four-fifths or the cultivated land and nine-tenths of the rural labor force--and given its low long-term growth rates in the order of only 1-2 percent, the development problems in agriculture are essentially those of the individual sector. Two extreme solutions are possible and have at some time 1/ There presently exists at the level of the Republic an Association of "Cooperatives". - 98 - apparently been considered but ruied out as unfeasible. First, a "take over" strategy by which the ind 4 . vi ual sector would bwe intraedinto thLe oc sector. Barring outright confiscation, the cost of acquisition through purchase would be prohibiti 4ve, at least in th shor an edurn And puC&Io ~~. LJ &J.%J1.AU L. L~ ~L £ - L LLLe short an mej'rn run..LW &Ulu acquisition through purchase would be inevitable if the land/labor ratios of Lthe VL.L soi lLUL J. [heetareC per WoLker, VL1sUs 2.2 hect!re per aCLV in the individual sector, in 1971), which is the basis for its higher producti- vity and income position, were to be maintained; subsequent secondary invest- ment in mechanization etc. would only aggravate the financing problem. Fur- thermore, this strategy would cause on unbearable strain on the rest of the social sector to absorb the displaced surplus population economically and socially. Second, an "enclave strategy", by which the social sector would be the sole "bearer of development" in agriculture, maximizing its own growth through using the individual sector exclusively as a provider of cheap inputs, and leaving the consolidation of the individual sector entirely to the dynamics of overall development. 185. Instead, Macedonia has shifted towards-a-middle position by which a major function of the social sector is to provide assistance and support the individual sector, thus serving as the nucleus for an accelerated dev- elopment of agriculture as a whole. Macedonia shifted into this direction earlier and more determinedly than most other regions of Yugoslavia. The recog- nition of a number of issues initiated this change. -Among them are, in partic- ular: (a) the potential for improving the balance of payments of the country through reducing food imports and increasing food exports; (b) the emergence of some abandoned agricultural land; (c) the effect of low productivity growth of agriculture holding down the overall growth rate of GHP; (d) the socially corrosive dualism of economic and social standard between (developing) urban and a (stagnating individual) rural sector of the society; (e) the overly long time span for automatic absorption (through overall economic dynamics) of the -ural into the modern scPtnr; (f) the reductinn of the nressure for employment generation in the modern sector through improvement of the poten- tial for gaInful work in the indIvidual sector. 186. To improve the condItIons within the IndIvidual sector, structural changes are required in the following direction: (a) improvement of physical yields through-improvnent of the mix and quality of inputs, and through improvement of production techninues; (b) improvement of the economic yields (revenues per hectare) through improvement of the output mix and improved market- ing of the output; and (c) consolidation of the rural active population and of the land holding pattern of the individual sector for establish- ing more viable units. 187. From the evidence available to the mission it appears that--in addition to improve extension service, access to credits, and improved coop- eration agreements between the social and the individual sector--the exten- sion of irrigation, affecting all three structural changes, is the most important single factor determining the potential and direction of future development of agriculture. This gives a key role to the going Macedonia/ Greece "Vardar-Axios River Development" project. It is to be designed as a multipurpose project with irrigation as one of the major purposes (in addi- tion to power generation, river flow generation and urban/industrial water supply). The project is now being prepared with the support of UNDP. About 87 percent of the surface of the Republic is within the project area and 93 percent of the project area is on Macedonian territory. The project contains 15-22 dams (see Annex Map 15) which are to be built over a 20 year time period according to an optimal sequence, considering the requirements for the partially competing purposes. 188. The "Final Data Review Report" 1/ on the prn-rect provides the fol1nt- ing data on land presently irrigated and suitable for future irrigation through the Vardar-Axios program. Table 73: IRRIGATION IN THE VARDAR RIVER BASIN PRESENT AND FUTURE: 1971 (in hectares) Surface Sprinkler Total In operation 21,132 14,897 36,029 Under construction 39,650 19,763 59,413 Plans prepared- 64,098 40,177 104,275 No plans prepared yet 134,713 334,430 Source: "Final Data Review Report", pages 42-45. These surfaces compare with cultivated land (in 1973) of about 663,000 hec- tares. That is to say, the share of irrigated land would rise from 14.4 per- cent presently or in the near future, to about 30 percent if and when the already planned projects were implemented, and to around 50 percent if and when the not yet studied project areas were also fully converted. Three fac- tors have to be kept in mind in this connection. First, a small portion of the presently irrigated land is located outside the Vardar basin; the shares 1/ Prefeasibility study prepared by The Economist Intelligence Unit Ltd., London and -drotechnic C rpo-a t , New York, undated. - 100 - of irrigated land for the Republic, therefore, would be slightly higher than shown. Second, the scope for irrigation is limited by total water availabil- ity for all competing purpcses; the study, therefore, qualifies the estimate for areas not yet studied by stating .. if sufficient water can be made available." 1/ And third, the report estimates total irrigable land elsewhere as high as 392,000 hectares, 2/ i.e. 59 percent of total cultivated land. 3/ 189. A critical factor in judging the development potential of large- scale irrigation on agriculture is its effect on output. On both elements involved--increase of physical yields per hectare for each specific crop, and change of the output unit to crops which generate a higher value yield per hectare but cannot be cultivated economically without irrigation--little information is presently available. According to informal estimates, the physical yield gains in the average year may be in the order of 50 to 100 percent for fruits and vegetables, 50 percent for cereals, and 100 to 200 percent for alfalfa. In addition, there would be the favorable effect from the change of output mix from dryland-farming towards crops which benefit particularly from irrigation. 190. In order to create the conditions for stable social and-economic conit-ionq in the individual sector- a size structure of individual holdings would have to emerge which generates a family income per holding comparable with that in the social sector. Without sizable expansion of irrigation, this would entail a large-scale transfer of agricultural population to a rura1 /4nAUSra4 orientation (as mentioned before, as much o - prc-nt of the present rural labor force might become redundant), the associated cost of housing and job creation would c se net t o msot decades to come. 4/ Some transfer would also be unavoidable in the case of large-scale irrigation, but the incese eoii c yields per hectare would probably reduce the size of the transfer substantially. These avoided social and economic transfer cost of (a reduced) rural surplus population could be a major indirect benefits from intrioduction of large-scale irrigation. In the assessment of the economic and social viability of the Vardar-Axios River Basin program this particular factor could play a decisive role. 1/ Page 45. 2/ Page 247. 3/ Annex Map 16 gives an overview of the areas under irrigation, presently and planned. 4/ Orders of magnitude are indicated by the fact that the costs of urban housing per family are estimated to be in the order of Dinar 350,000 (without secondary investments like urban roads, schools, hospitals), and the average amount of fixed assets per worker in industry came in 1972 to more than Dinar 100,000. -101 - 2. Forestry 191. Forestry--totally within the social sector 1/--has a miniscule role in the economy of Macedonia. In 1974, it contributed a mere 0.8 percent to GMP, and no growth (in constant prices) took place since the early 1960's. As for employment, forestry employed about 3,000 workers in 1973 accounting for about one percent of total social sector employment; the share of forestry in total economic investment in the social sector come 0.4 percent of the total in 1974. 192. An overview of the physical characteristics of forestry in Macedonia is prasented below for 1961, the most recent year for which comprehensive dat% have been collected. Table 74: FORESTS IN MACEDONIA, 1961 (in 1,0 hectares) Total Surface 2,57/[ Forests, total 883 High forests 25 Low forests 630 Deciduous 825 Evergreen 62 Sufficiently kept 509 Degraded 196 Bushes 183 Source: Republic Secretariat for Agriculture and Forestry. More than one-third of the surface of the Republic is classified as "forests". However, as the results of centuries of overuse and neglect, most forests are by growth characteristics, species and care of low quality and their yield, accordingly, has little commercial value. One should add that no sharp borderlines can be drawn between the various forest categories, and between low grade forest stands on the one hand and pastures and unused land on the other hand. 193. The importance of Forestry is for these reasons not seen in its economic potential but rather in its role for erosion control and water management and for its micro-climatic effects. Reforestration and affores- tration, therefore, are the primary activities in the forestry sector. The 1/ The official statistics report only on the social sector. However, an unknown portion of the forest surface is individually owned (mostly) by the individual farmers and exploited for fuel wood, generally without any further care. For 1973, about 12 percent of the total cut is report- ed for the individual sector, but this may be an overall lo,q estimate. Republic has prepared a program for aforestration of about 100,000 hectares for t x 20 years. LJue to the shortage of Li.LnancLaL' resources--whiCh are generated only to a small fraction through the cut and have, instead, to be provided from the Republic and communal budgets--progress was slow (in the order of 1,500 hectares per year), but has somewhat improved in recent years due to availability of funds from budgetary resources. 194. A strictly commercial forestry activity is the cultivation of pop- lars in marshy land adjacent to rivers and streams, jointly by forestry enter- prises, agricultural kombinats and water enterprises. A limited experimental program started some 10 years ago and has provided favorable results. Pre- sently a program is being prepared to plan at least 10,000 hectares over the next 10 years. - 103 - 3. Industry 1/ 3. Overview 195. Industry was--as in other parts of Yugoslavia--the leading growth sector in the economy of Macedonia. GMP originating in industry grew (in 1966 prices) by an average rate of 13.6 percent between 1952 and 1973, and was the force which pulled up the overall growth rate to an average of 8.3 percent. Its share in GMP (in current prices), accordingly, increased greatly over the two decades from about 15 percent in 1952 to about 36 percent in 1973. The average growth rate of industry in Macedonia also exceeded substantially the average growth rate of Yugoslav industry (10.5 percent) and by 1973 the share of industry in the economy of Macedonia had reached the corresponding share for total Yugoslavia. The growth momentum of the industry sector also held up surprisingly well over the past two decades. It dropped only slightly from the level of 15 percent during the 1950's to 14 percent after 1970, while the industrial growth rates in total Yugoslavia dropped from 14 to 8 percent. Macedonia's share within the industry of total Yugoslavia increased persistent- ly from hardly 3 percent in 1952 to almost 6 percent by 1973. 3.2 The Development and the Characteristics of the Industrial Structure 196. The dynamics of industrial growth and the structural features of the finditrv sectnrbcme mre tna narnt by consolidating the varioUS branches into two "sub-sectors" and several industry "groups" within each. Basic Industry 2/ Energy (electric power, coal) FerroI.us Metal.lurgy Other basic industries (petroleum, non-ferrous metallurgy, chemicals, pulp and.paper) Light Industry Engineering (metal products, electrical products, ship-building) Textiles and leather Food processing and tobacco Other light industries (non-metallic minerals, construction material, wood products, rubber, printing, others) 1/ In the Yugoslav classification "industry" includes power generation (as a separate branch), coal mining (ncluded in coke and coal), an, other mining and quarrying (included in ferrous metallurgy, non-ferrous metal- lurgy, non-metallic mineral products, and construction material). 2/ The "basic industries" coincide, for total Yugoslavia industry, with the seven branches showing the highest capital-labor ratios. Within Macedcnia, with a comparatively small and more specialized orientation within each branch, the ranking is less clearcut. Compare paragraph 199 below. - 104 - Using this classification, composition and growth of industry developed as follows: Table 75: STRUCTURE AND GROWTH BY INDUSTRY SUBSECTOR: 1961-72 (Percentages) Share of GIP (curr. prices) Growth rates (1966 pr.) SM iL SFRY 196r1- 72 1961- /1 1972 1972 SRM /2 SFRY Energy 5.7 5.7 9.8 11.7 7.6 1 C If If. 1, 1 '1' Ferrous metallurgy I.5 V.4 I4.' 27.8 Other basic industries 11.3 12.3 15.0 12.6 13.6 LOT81~ DESI IEGTTe 10.n 4. LO. .^. IU. Total basic industries 18. 2 4 . 4 28.9 14.60 10.6. Engineering 9.1 8.4 25.0- 10.9 9.4 Textiles and leather 18.5 21.9 15.1 13.5 7.6 Food and tobacco 33.9 23.5 11.3 8.1 7.6 Other light industries 20.0 21.7 19.7 12.6 8.5 Total light industries 81.5 75.5 71.1 10.9 8.5 Total industry 100.0 100.0 100.0 11.7 9.2 /1 TP. /2 Estimated through combining respective current price shares with total sector growth in constant 1966 prices. Sources: Statistical Yearbook Yugoslavia 1974, Tables 105-4, 204-2, 204-5; 1971, Table 203-1; 1964 Table 203-7. 197. The structure of Macedonia's industry changed markedly between 1961 and 1972. The share of basic industries increased by one third, largely as the result of the beginning operations of the Skopje steel works. In light Tndustr+Ps thp role of the textile and shoe industrv increased slightly. whereas the importance of Macedonia's traditional industries--food and tobac- co processing, the industria1 utilet of Its agrfrultural sector--dropped from one-third to one-quarter. The comparison of the recent industrial structure of Macedonia with that of total Yugoslavia shows comparable shares for both basic and light industry, but vast differences within each. Within basic 4ndUStries, xlacedonia's share in the- eme-rg sector is still1 r-markably low. Within light industries, Macedonia has evidently not been successful as yet in developing an engineering industry, probablU I .Ay due t d of acquiring-the necessary technological know-how. On the other hand, the tex- tile and shoe industry is strongly represented in Macedonia. oVst significant is the strong role of Macedonia's food and tobacco processing industry. The growth rates show the dynmism of industrial development in Macedonia. Apart - 105 - from "other basic industries" 1/ the growth rates in Macedonia exceeded in each case the Yugoslav growth rates, and in most 4instances by we A marginP. - for food and tobacco industry for which the declining share seems to point to a stagnation, thegrt.hLir1UWL LL WasM UIUUbL almUos L LU LIoIL U. YUgsLaV iLLusry as a whole. 198. Macedonia's present industrial structure is characterized below: Table 76: STRUCTURAL CHARACTERISTICS OF INDUSTRY, 1972 GMP Employment Fixed Assets Investment SRM %SRM SRM/SFRY(%) % SRM % SRM %/1 %/2 Energy 5.7 3.2 3.4 27.9 18.4 9.5 Ferrous metallurgy 6.4 8.5 6.4 7.0 35.5 10.1 Other basic industries 12.3 2.9 11.9 12.0 11.1 22.6 Total basic industries 24.4 4.6 21.7 46.9 65.0 42.2 Engineering 8.4 1.8 11.5 7.9 6.4 10.5 Textiles and leather 21.9 7.9 30.0 14.1 7.8 11.9 Food and tobacco 23.5 11.3 14.7 14.2 8.2 17.5 Other light industries 21.7 6.0 22.1 16.8 12.7 18.1 Totanl ligyht industries 75.7 5.8 78.3 53.0 35.1 58.0 Total industry 100.0 5.4 100.0 100.0 100.0 100.0 /2 Average 1971-73. Source: Annex Tables 31 and 32 The shares by subsector of Macedonia in total Yugoslavia (in GMP) highlight again the aforementioned structural differences. Macedonia holds a particu- larly strong position in food and tobacco, ferrous metallurgy, and textiles and leather, and a weak position in engineering. While for employment the role of light industries is about equal to the Yugoslav average, differences are evident with respect to fixed assets (Yugoslav average 44 percent) and investment (Yugoslav average 47 percent). However, for investment the recent 1/ Which include in other parts of Yugoslavia petroleum and refining, one of the most dynamic industrial activities which is not represented in Macedonia. - 106 - period (1971-73) showed a dramatic reversal over the preceeding period (1966-70) during which basic industries absorbed almost two thirds of total investment resources available for industry. This shift is probably caused by a combi- nation of factors, like growing difficulties of affecting foreign financing, receding requirements for major projects in energy and ferrous metallurgy and increasing concern for employment generation. 199. The three most relevant indicators of the operational characteris- tics of industry are (a) the capital/output ratio (COR) the inverse of which represents the productivity of the existing capital stock, (b) the capital/ labor ratio (CLR) which mpaRurps thR factnr rombinntini ( and (c) the gross accumulation rate (depreciation plus allocation to permanent business ftlndq nf enttrprises In reltnn to v e of fl-vaed assets) which shows the capacity to generate resources for further investment. Table 77: OPERATIONAL CHARACTERISTICS OF INDUSTRY, 1972 COkL CLR_ (100in) iQC Ac.ae SRM of Y.av. SRM % of Y.av. SRMI % of Y.av. Energy 11.15 160 866.6 151 4.3 69 Ferrous metallurgy 2.50 85 114.3 57 1.7 13 Other basic industries 2.23 79 105.9 52 11.1 83 Total basic industries 4.39 104 226.672 5.7 61 Engineering 2.15 147 71.8 101 3.0 19 Textiles and leather 1.48 125 49.5 105 17.3 72 Food and tobacco 1.39 75 101.3 88 16.2 119 Other light industries 1.78 125 79.9 116 13.8 73 Total light industries 1.61 110 71.1 102 13.8 78 Total industry 2.29 101 104.9 87 10.0 76 Source: Annex Tables 31 and 32. 200. These figures 1/ lead to three important conclusions. First, compar- ing the two major subsectors for Macedonia, the light industries generated per unit of investment about double the income, about three times the volume of employment and more than double the accumulation for reinvestment. Hence, Macedonia's stronger orientation of industrial devPlopment towards the light industries 2/--stronger than in the Yugoslav average and, even more so, stronger than in the other less deelop regons--deotrt an 4iustrial 1/ The accuracy of the absolute value of all three ratios can be questioned for methodological reasons. Compare paragraphs 88, 102 and 103. However, every systematic error would affect all sectors and all regions equally, so that the comoarison remains valid. 2/ Compare paragraphs 196-198 above. - 107 - development strategy which, choosen for whatever particular reasons, has made a more efficient use of the scarcest and ultimately limited factor for development: investible financial resources. This industrial development strategy of promoting light industries, has decidedly worked to the advantage of Macedonia, and is a major cause for its above average industrial and total GMP growth and employment generation. It could be argued that the price paid for these advantages is a lower average productivity of labor (output per worker) of only 86 percent of the Yugoslav average for total industry. But this measurp (the ratio of CLR/COR) rnflects to a large deeree the difference in capital-intensity (capital-intensive activities are bound to show a higher output per worker because of the high non-1hnr comronent in the total) at least as much as genuine differences in efficiency of labor. 201. Second, in comparing total industry for Macedonia and the country as a whole, Macedonia is about at par with the Yugoslav average, with the exception of the lower accumulation rate. However, its industry compares fLavorabL.Ly with that of the other less developed regions. Table 70 OPERATIONAL CHARARI SOF TOTAL INDUSTrlY BY REGIONS, 1972 Output p. worker COR CLR (1000 Din) Acc. rate (%) (1000 Din) Bosnia-Herzegovina 2.60 129.7 11.4 49.9 Montenegro 3.46 165.0 8.2 47.6 Macedonia 2.29 104.9 10.0 45.3 Kosovo 4.03 181.6 6.2 45.1 Croatia 2.03 115.6 14.0 57.0 Slovenia 1.91 119.6 17.5 62.6 Serbia Proper 2.51 121.1 11.8 48.3 Vojvodina 1.99 104.9 14.8 52.8 Total Yugoslavia 2.26 120.3 13.1 53.2 Source: Statistical Bulletin Yugoslavia No. 830. The average productivity of labor seems to compare unfavorably, even with the other lpq.q devP1nnPed regions. However, for reasons mentioned above, this appears at a closer analysis largely affected by the less capital-intensive structure, and differences in the -ffi4ienry of labor only affect the com- parison with most of the developed regions. 202. Third, the comparison by specific industry groups gives some indi- catitheofooh advtoaor nds V ae o Macedonia vis-a-vls Yugoslavia. In the food and tobacco industry group Macedonia is clearly suT)erior. For - 108 - "other basiLc industries" -aedIi has onbaaneanabu-eua-tadad For textile and leather, and for "other light industries" Macedonia lags clearly somewhat behind. ThLe diffL4erences are grave 'for tefrosmtlug and for the engineering subsectors, while for the energy subsector Macedonia's case is too atypical for any comparison. 11 aUbeL of a CL corepod ance between subsectors and totals demonstrates the importance of the structure in the relative success of industrial development: Macedonia's industrial development compares in balance so well- with.the Yugoslav average (and more so the average of the other less developed regions) because of the high re- liance on the relatively successful industry groups and the lower weight on the less successful ones. 1/ 3.3 Subsectors 2/ 3.3.1 Basic Industries 203. Energy: The situation for generation and consumption of electricity is summarized below: Table 79: GENERATION AND.CONSUMPTION OF ELECTRIC POWER, 1963-73 (million Kwh) SRM SFRY SRM/SFRY (%) 1963 1973 1973 1973 Generation: 466 1,188 35,062 3.4 Net exports 9 0 49 Self-consumption and losses 37 194 5,499 Net purchases from other Republics 185 -1,713 0 Available for distribution 605 2,707 29,514 9.2 Industry 449 2,056 16,639 12.4 Households 109 525 8,621 6.1 Other 47 126 4,254 3.0 Source: Statistical Yearbook Yugoslavia 1974, Table 208-14. In 1973, 90 percent of total generation of Macedonia came from hydropower facilities. 1/ The comparison of this paragraph disregards effects of structural dif- ferences within industry groups which can have a considerable impact. 2/ The subsequent description and analysis can, for obvious reasons, not be complete and exhaustive, but can only highlight selectively the con- ditions and develooment nroblems fn major actvities. - 109 - 204. Until recently, the non-discovery of mineable coal deposits had pre- vented the development of any sizeable thermo-power generation capacity within Macedonia, and the shortage of investment funds has discouraged the Pxpans ion of the particularly capital-intensive hydro-power capacity, resulting in a growine imbalance betwepen ge-nartinn on-nnnmtntf By 1973 nlmtostto thirds of total consumed power was purchased from other regions of Yugoslavia. Muring the panst perInd f sufflcient overall power supply, and of comparatively low power prices (in 1972, gross accumulation of the power sector in Yugoslavia as a whole came to only 5.8 percent of: value of fixe -Asesvsu131pr cent for total industry), heavy reliance on power purchases from other regions, although~~ inolin so patiiato in fiacig has bee of b _-Enefi _Ct to ~ v~J ."VJV.L". 7m~~~um FCLX L.14C. . P C lot JA." LLk&JULL.LL&6, LIdUb UtSCLL UL ULLMe.LL L Macedonia. However, Yugoslavia is approaching rapidly an overall power deficit, and a social contract has recently been made for all Republics and Provinces requiring each to totally finance its future power requirements 1/. rower prices are also being revised upwards to gradually raise the accumulation rate. These changes determine the future development strategy for the energy subsector of Macedonia. 205. As to power consumption, the Macedonia ratio of 0.153 KWh per Dinar GMP (for 1973) is significantly above the Yugoslav average of 0.096 KWh per Dinar, which reflects a more power-intensive economic structure in Macedonia. The greater power intensity of Macedonia is particularly evident for the in- dustry sector, for which power consumption per unit GHP is more than twice the Yugoslav average. For household consumption, the reverse relationship can be observed: -the per capita consumption in the Republic of 308 KWh (in 1973) was only 75 percent of the per capita consumption in the Yugoslav average. reflect- ing the lower standard of living in Macedonia. For the total period 1963 to 1973, power consumption in Macedonia increased by an average 16.2 percent per year, far exceeding the Yugoslav average of 10.1 percent; the elasticity of power consumption in relation to GMP in Macedonia of about 2.0 exreAded sig- nificantly the Yugoslav average of 1.6. The major industrial causes of Macedonia's exceptional1v high and rapidly rising power consumption are prob- ably steel producticn, ferro alloys, lead and zinc, cement, and chemicals. 206. Macedonia produces presently neither coal nor gas. A joint Macedonia-Kosovo gas ppaline was buillt Qevrarl years agon ,nnetn-g th lignite gasification plant in Obilic (near Pristina) with Skopje. But due to the low calorific value of the gas (3600-4500 Keal/m3) and the Irregular supply (due to erratic operations of the gasification plant) the capacity is only beIng used at about 10 percet, ad te PO Liies for a future improvement are unpromising. 207. Macedonia is presently a large deficit region with respect to power. It imports a total of 1,884 million KWh a year from Kosovo and Serbia under 1/ Comare paragraph 207 below. - 110 - long-term agreement which involved the contribution of credits. 1/ In recognition of the drastically changing supply and price relationships in recent years, and the continuing growth of power demand, a social contract for the development of power was made for all Yugoslavia. This would require each region to fully finance its energy needs from its own investment resources and makes the export of power from one region to another conditional upon satisfying own needs. 2/ Given the recently discovered lignite deposits and its hydropower potential, Macedonia has in 1974 initiated a long-term power development program which was codified in legislation and social contract 3/ and assumes the highest priority in the 1976-80 Social Development Plan. Hydro-power generation is expected to increase from 1,144 million KWh in 1974 to about 2 billion KWh by 1980, and to 3.3 billion KWh by 1985. Major projected stations are Tikves EI (47 MW, 1977), Gradec (54 MW), Cebren (127 MW, 1980), which would all be part of the Vardar- Axios River Basin project, 4/ and Kozjack (75 MW) on Treska River. 208. For thermo-power, Macedonia expects to continue purchasing the present amount of power (1,884 million KWh per year) under the existing long- term contracts with Kosovo and Serbia. In addition, plans are at various stages of nrepnaratio-n to set ina s rie oF new statins fiilled by lonal1v mined lignite. Arrangements were made for Polish credits for an open pit liginite ni-n nenr Kieon and an adjaent nnper nlant of 120 MW Cnrqtritnn startpd at the end of 1973 and it is expected to become operative by 1977. Plans are also at an advanced stage for starting up an oil-fired power statien of 210 MW financed by credits from the USSR. Thereafter, further development of thermo- power production will be centered in lthLe Pelagonila Plain (near Btl) hr large lignite deposits have been discovered recently with an overburden of t060 meters, and average sea7m o. 18 meters and an average heating value of 2200-2400 Kcal per Kg. Presently two power stations (Bitola I, II), with a capacity of 210 MW each, are planned to become operative between 1979 and 1980. In connection with the Pelagonia site, possibilities are also being-studied for converting lignite into higher value solid fuel ("cke" and "brickets") for industrial and residential use. 1/ Because of overall supply limitations, Macedonia experienced a deficit of about 600 million KWh in 1975 and a commission for energy was set up to regulate the allocation of electric power under conditions of short- age. The loss of industrial production on account of energy shortage is estimated to have been in the order of 2 percent for all industry. 2/ The solidarity law applies to shortages in excess of 10 percent. 3/ Which set up production targets and sources of financing. Compare paragraph 229. 4/ Discussed below in Chapter D 1.8. - 111 - 209. These investment programs imply an average annual increase of con- sumptin of aout 14 pnercn per h1e 1Q73 nd 1Q80 e (on the assumption of an average growth rate of GMP' of 7.5 percent, as realized during the present Five-Year Pn period) to an elatct of power cons ump- tion of 1.9. This very high growth rate and elasticity obviously reflect the strong emphasis on. basic industries in the presnt thining on fuur development. The power development program translates into financing needs whliCh are in the order of US600 $ IEN mi.11 llon. 210. Discussions with Naftagas and preparatory work are presently under- way to extend the Naftagas natural gas pipeline system to Macedonia. The Republic would need by 1980 about I billion Nm3 per year (mainly for industrial use), by 1985, 1.6 billion Nm3, and by 1990, 2 billion Nm3. To the understand- ing of the mission deliveries of the low-calory (lignite) generator gas from Kosovo would be discontinued, and no plans are presently considered to ini- tiate gasification in connection with the new lignite mines to be opened in Macedonia. 211. Ferrous Metallurgy: Iron ore is presently mined (in open pit mines) at three locations in Macedonia; the average Fe content is 38.6 percent. The capacity of the mines is estimated to be around 6 million tons, but production in 1974 came to only 1.8 million tons. This gross disequilibrium between capacity and output is caused by the fact that the Skopje steel mill is-- given the quality and location of Macedonia's iron ore--the only economic outlet. In line with the planned expansion of the steel mill, mining output is expected to approach capacity around 1980. 212. The Skopje iron and steel works started operation in 1967 from a low initinl 1pnal- Rv 1971--th- nii iron Panactv of 360-000 tons ner vear (five electric furnaces) compared with an output of 250,000 tons, equivalent to 12.5 of the Yugoslav total. For the steel-makin g, two LD converters (capa- city 700,000 tons) and one electric furnace (capacity 300,000 tons) produced an output of about 370,000 tons, equivalent to about 13.7 percent of the Yugoslav total. The rolling mill has a (hot) strip stage (capacity 540,000 tons), a (hot) plate stage (capacity 190,000 tons), and a (cold) sheet stage (capacity presently extended from 180,000 tons to 930,000 tons). However, total final output in 19-73 came to only 2,00tons (thic and medUMset) ~AJL... L4.L4 U LJL. LU j. 0 '1 L.Ofl -JtlLy - JJ I.JLO '. I.*JAcS all.. me--¶ sheets).L. , equivalent to 58 percent of the Yugoslav total. As to further processing, presently the Skopje steel mill turns out some 35,000 tons of heavy steel construction. Of major importance is the Kumanovo steel pipe mill which produced in 1973 about 70,000 tons of welded pipes, close to its capacity, equivalent to about 29 percent of total Yugoslav production. 213. It is apparent from this brief sketch that the ferrous-metallurgy sector is presently faced with very severe problems. Most prominent among them is the gross imbalance of capacities at the various stages of produc- tion. In spite of attempts to relieve the problems through economically 1/ For financing arrangements see paragraph 229. questionable shipments to and from other parts of the country and abroad, this results in a very unsatisfactory utilization of most of the existing capacity. Reportedly additional problems pertain to plant layout, operation, product quality and marketing. The exceptionally,low gross accumulation rate of the sector in 1972 of only 1.3 percent in relation to fixed assets (com- pared to 13.6 percent in total Yugoslavia) is the conspicious expression of the economic impact of the severe technical problems; even this low rate is misleading, since the sector showed a loss (decline of permanent funds) al- most equal to the accounted depreciation. 214. To correct for these deficiencies, a major program for consolidation has been initiated. First of all, a blast furnace with a capacity of about 750,000 tons per year is to be built to break up the most severe bottleneck; it would, after some modifications in the rolling mill, bring the iron-making, steel-making and rolling stage close to a balanced overall capacity. Projects are also being prepared to add on facilities for plastic coating and tin plating for further processing of the thin sheet output. In addition, a major expansion is anticipated for the Kumanovo pipe mill where by 1980 the pipe-making capacity is to be increased to 220,000 tons, supplemented by an additional capacity of 160,000 tons of welded profiles. The consolidation of Macedonia's ferrous metallurgy is accorded high priority (next to the develop- ment of the energy subsector) in the forthcoming Five-Year Plan. 215. Non-ferrous Metallurgy: The ore deposits of Macedonia's traditional non-ferrous metal--chrome--are rapidly being exhausted, and no further deposits are presently assumed to exist. For lead and zinc, the ore production came in 1973 to around 600,000 tons (20 percent of total Yugoslavia); after re- construction of the mines the output is expected to increase to 1.1 million tnsR hV arndA 1980 In tiadditio-n- vt urnavlnred anrd iiit zed resotrncs are expected to exist amounting to more than 30 million tons with a metal content of 7-8-percent The eporati-- and plan-bing for exploitation is stalled for lack of resources. The processing facilities with a present capa- city of 70,000,- -tons (con centr at e) are to be increased to 150,000 tons by 1980. The present smelting plant of 66,000 tons has overcapacity with respect to zinc and a capacity 0ttLeneCk WILLL LpCt L aLU. As for Lerrous-eIaILLULy, the balancing of the various stages within a coordinated and completely fi- nanced program is the major problem for the next Five-Year period. For copper, new deposits have been discovered, and the opening of a new mine and processing facilities (100,000 tons concentrate, 22 percent copper in the concentrate) is planned, to be operational by 1980. For nickel (ferro-nickel), a new mine (near Kavadarci) with a capacity of 500,000 tons of nickel pellets and 16,000 tons of pure nickel, and of 300,000 tons of iron pellets with a Fe content of over 50 percent is planned. For manganese, plans are being finalized for opening of new mines and the associated processing facilities near Kicevo. For antimon, one new mine is presently being opened and expected to .be operative by 1976, two additional mines are planned for the next Five-Year Plan period. 216. Total financial requirements for these projects are estimated to be in the order of $500 million. For the ferro-nickel project (FENI) and copper -113 - which account for about half of this total, the largest proportion of invest- ments has been secured through an international consortium (of EXIM and other banks). For other projects, implementation would also depend upon the avail- ability of foreign financing which has either been contracted or is in the process of negotiation. 217. Chemical Industry--Refinery: A number of sizeable petrochemical processing activities have been initiated in Macedonia, and a major multi-stage expansion progrnm is hing planned for the next Ffve-Year Plan. For examnle. the existing small PVC plant with a capacity of about 5,000 tons (25 percent of total Yugoslav output in 1973) will be increased to 50,000 tons in a joint venture with Pecheney. The capacity of the existing polyacrylic fiber plant (15,000 tons, the only such operation in Yugoslavia by 1973, will be doubled by 1978. A polyester fiber plant with a capacity of about 14,000 tons, the first such plant in Yugoslavia, will be bauil in a joint venture arrangement with Dupont, and a project for a polyamid fiber plant with a capacity of 10-12,000 tons is under preparation. 218. These activities are to be supplemented by the production of "basic petrochemicals"'. These facilities, in turn, are to be established adjacent to a planned refinery with an initial throughput of 2.5 to 3 million tons of crude, to be located in Skopje and to be operative by 1978. The refinery would, in addition to serving as the initial stage of the envisaged "petro- chemical complex", supply the gasoline and fuel oil requirements of Macedonia, Kosovo and southern Serbia. Initially the refinery would receive its crude oil by railway from Saloniki, but in conjunction with a yet unspecified sec- ond refinery the construction of a pipeline is planned, connecting Skopje with a site near Saloniki. 219. As for the other basic industry activities, implementation would hinge on the availability of foreign resources in the form of joint ventures or credits, and no estimates could be obtained as to the total amount of re- quired resources. 3.3.2 Light Industries 220. Engineering: In the engineering subsector the major activity is the assembly and production of chassis of busses; all other activities, including manufacture of machine tools and electrical equipment are insignificant in size and importance. The sihctor waq obviously suffering from difficulties in acquiring access to know-how from enterprises in other parts of Yugoslavia and abroad. For the neW Five-Year Plan some new developments are onvisaged esne- cially in the field of electro-engineering in addition to the planned expan- sion of the manufacture of packing material for the food processing industries. 221. Textiles and Leather Goods: Macedonia is the only region in Yugos- lavia growing cotton. The production, however, comes only to about 3 percent of Yugoslavia's needs, and due to low comtparative yields no increase is expected -114 - for the future. For wool, the contribution of Macedonia is similarly insigni- ficant in spite of herds totalling almost 2 million heads. Major reasons are the low yields and the low quality. Efforts to improve the breeding stock are being made but little change is expected for the foreseeable future. 222. For the processing stages, Macedonia's present position is summarized in the table below: Table SO: TEXTILES AND LEATHER GOODS PRODUCTION, 1973 SRM SFRJ SRM/SFRJ (%) Cotton Yarn (tons) 19,000 103,000 18.4 (nt-nr fnhrirs (mil m2) 42 361 11.6 Wool yarn (tons) 4,667 41,942 11.1 Wool fabrics (mil n2) 42 361 11.6 Rayon fabrics (mil m2) 3,442 35,899 9.6 R.,eady -mAde clothes, underwear (mil m2) 17.6 112.3 15.6 outerwear (ml _2) 3.8 81.4 4.7 Knitted goods (tons) 1,311 21,519 6.1 L eathe (100 m2)n 1,5N I418 10.9Z Shoes (1000 pairs) 2,034 4,762 4.9 Leather outerwear (1000 m2)l9 ,8 . Source: Statistical Yearbook Yugoslavia, 1974, Table 208-8. In the cotton industry about 60 percent of the yarn is processed locally. Sizeable portions of cotton raw cloth are either exported or sold to other parts of Yugoslavia. Most of the output of the wool industry is consumed and/or processed locally. The ready made clothing industry has a high export share, particularly in the form of "processing contracts". In contrast to the textile industry, the shoe industry, which has the highest export share (60-70 percent of output in 1973), was severely hit by export marketing problems. 223. Little is known at this point about future expansion plans of tex- tiles and leather goods industry. However, it seems that, with the exception of a moderate expansion of cotton spinning and some modernization, new invest- ments for the next Five-Year Plan period would mainly depend upon the market- ing potential in the country and abroad. 224. Food Processing and Tobacco: The important role of Macedonia in this industry group is indicated by the figures below: -115 - Table 81: FOOD PROCESSING AND TOBACCO INDUSTRY PRODUCTION, 1973 SRM SFRY SRM/SFRY Pastes (tons) 2,857 54,448 5.2 CtTnpd frilt. andi vpacPrsa1n. (1000 tons) 14.0 103.2 13.6 Edible oil (1000 tons) 10.5 168.3 6.2 Ground pepper (tons) 1,197 4,300 27.8 Wine (mil liter) 23 166 13.9 Fermented tobacco (1000 tons) 26.0 57.4 45.3 Cigarettes (tons) 7. .3 .9 Source: Statistical Yearbook Yugoslavia, 1974, Table 208-8. 225. Food processin capacity is presently conceived as a bottleneck for further expansion of fruits and vegetables production, with existing facilities being grossly insufficient and often with traditional technology. Macedonia has the following food processing plants: (i) One factory for edible oil with output of 12,000 tons per year. It is presently being modernized for a planned capacity of 21,000 tons by 1980. (2) One factory for sugar milling with output of 150,000 tons of sugar. It is expected to double in the coming years with reconstruction to start in 1976. (3) Five small factories for fruit and vegetable canning, with an output of 25,000 tons. This allows the processing of only 10 percent of vegetable and 2 percent of fruit production. Activities are underway for reconstructing three of the above factories and setting up of a new largely tomato canning factory which would allow doubling of capacity. (4) For wine, there are 13 stations for collection and fermenta- tion near vineyards, but only one bottling factory in Kavadarci. A new proc- essing plant. which the World Bank participates in financing. will be set up. This will allow full processing of the output of 124,000 tons from the 13 collection stations planned for 1980. (5) Discussions are also underway with the World Bank for participating in the financing of a meat processing Plant- The total investments required for the planned construction and recon- struction and expansion of food processing facilities is estimated at about Dn. 1. b MIlIonn fonr 19Q76-80. 226. There are 26oranzainsc fo buying and fermentIng tobacco In Macedonia (95 percent of production is by individual producers; 95 percent is o-4ie#tal tobacco and 5 percent is Virgi-n tye. All 26 oraiai nvar incorporated into an association "Yugo Tutun". There is also an Institute for T'o ba c co a nd an E Xpoar t -ITmport Enterpr-ise. Of te26 organizat-ions only 3 under- take further processing of tobacco: the Tobacco Kombinat in Prelip (the largest with about 70 percent of cigarette produLiU), LLte ULXcU NUUmL1iL Spj and Tobacco Kombinat in Kumanovo. The Kombinats in Prelip and Kumanovo were recently reconstructed, but the one in Skopje remains largely obsolete. About 70 percent of fermented tobacco is exported abroad. Macedonia accounts for - 116 - one-half of the Yugoslav output of fermented tobacco and about 20 percent of cigarette production which is mainly for domestic consumption. The program for the 1976-80 envisages the reconstruction of the Skopje factory. It also foresees some change in the structure of production in favor of Virginia type tobacco to substitute for what is presently imported. 227- Other TAaht-TndTr4Pc* An nvervip nf thp mainr rtivrftia in Macedonia within this industry group is.given below: Table 82: OTHER LIGHT INDUSTRIES, PRODUCTION 1973 SRM SFRJ VD SRM,/SFRJ(%) RefLaLtLy LUaLteLL (1kJ00 LUns) 19 15.7 10.6 Ceramic goods for households (1000 tons) 5110.0 .5. 5.1 51.0 Ceramic goods for construction (1000 tons) 35.4 114.6 30.9 Glass containers (1000 tons) 43 287 15.0 Bricks (million) 225 2,980 7.6 Cement (1000 tons) 953 6,376 14.9 Sawn woods (1000 m3) 69 3,429 2.0 Plywood (1000 m3) 7 95 7.4 Chipboard (1000 m3) 32 321 10.0 Furniture (1000 sets) 80 460 17.4 Source: Statistical Yearbook Yugoslavia, 1974, Table 208-8. The industries for heat resistent material,-.ceramics, glass and cement are based on the availability of favorable raw material and--in the case of glass containers--on the local demand for packaging of beverages and processed food. All activities have moderate investment plans for the next Five-Year Plan period, but may be in a difficult position to ascertain the necessary funds. 3.4 Issues for Future Industrial Development 228. Although the Plan for the next Five-Year Plan period is still under preparation, the thrus,t of the industrial development strategy is already e J1 1 C'J J clear. High priority is given to the development of basic industries and especially energy, which is expected to account for about 38 percent of the total industrial investments in the coming Plan period as compared to 17 per- cent in the previous Plan. Investment in basic metallurgy is foreseen to account for another 27 percent and the balance will be shared by all other industrial branches. Light industries would, consequently, be confined to a smaller share than during the previous Plan period.. - 117 - 229. With respect to financing, firm arrangements are reported to have been made for securing the necessary resources for investment in energy and a number of basic metallurgy and other industries. For energy a community of interest has been established encompassing both users and suppliers of energy and a social contract has been concluded providing for the sources of financing the envisaged five-year investment program for energy from domestic 1/ and foreign resources (in the ratio of about 65 percent and 35 percent respectively). As to other major basic industries, only limited amounts of domestic resources will be committed for their development, with the bulk of financing to be through already contracted foreign loans and , credits. 2/ With the current balance of payments constraints and debt situa- tion of the country, only modest additional foreign borrowing is likely to be open for the remaining industries. Adequate domestic resource mobilization is, therefore, likely to be the crucial factor for the further development of light industries and maintaining the desired balance between them and basic industrie. I 230. However, if a different pattern should naterialize, it will have strong repercussions on the course of industrial development during the next Pnper-Io -And bwyond . AS metine earlier, basic industries tend to be more capital-intensive, tend to have higher average capital output ratios and lower accumulation rates. LhUs, any shift of focus of the LUUstra.LU development strategy will--at any given amount of total investment in industry-- lead to lower growth of employment, GMP and generation of resources for further investment. Further, most of the major projects in the basic industries have very long lead times between actual investment and full operation of the estab- lished facilities, causing a sudden and probably quite steep temporary upward shift of both the incremental capital-labor ratio and the incremental capital-- output ratio. This, in effect, would tend to pronounce the aforementioned adverse effects. On the basis of the preliminary information on total avail- able resources, allocation pattern and on leading parameters of industrial development, the possibility cannot be discounted that--unless the total envisaged resources for industrial development could be secured (e.g. through largely increased foreign financing or a tightened policy for enterprise income distribution)--the objectives of the next Five-Year Plan may be hard to achieve, particularly with respect to employment generation. 1/ At end of 1975 a law was passed requiring all working organizations in the economy to contribute 8 percent of their surplus, after payment of all obligations, as credits for financing the construction of power stations. Effective January 1976, the electricity tariff for house- hold and industrial uses was also raised by about 30 percent. Fifteen percent of Federal Fund credits for the coming five-year period is also dedicated for investment in energy. 2/ Compare paragraph 233. - 118 - 231. With reference to relative priorities as presently conceived, the following observations may be made. For energy, the top priority is obviously caused by the concern over the possibility of power shortages as a critical bottleneck for further growth. Macedonia will continue to import energy under its long-term agreements with Serbia and Kosovo. Given the present requirement that each Republic and province finance its energy needs 1/ and the existing hydro- and thermo-power potential of Macedonia, the Republic plans to meet its expected high power requirements for the next five-year period largely through domestic production. Because of the high cost of energy, investimont doisions vAll be takeon onlv fnr thne power intansive industrial activities which are economically justified taking into account the associated costs of energy in a9ion to thetr n costs 1232. As tote mhsi ivnt ferrous metallurgy, thJaioaei obviously the urge to make the Skopje steel mill, into which already large investment has been made, a viable enterprise. Although a more cautious initial planning might have led to a different use of the resources invested to this date, they are actually "sunk costs" for the future planning and the determined efforts to create a balanced complex may yield high returns. 233. As to non-ferrous metallurgy, it is the understanding of the mis- sion that for copper and ferrous-nickel projects, foreign resources represent- ing about 75 percent of their estimated total cost of Din. 4 billion have already been contracted. Other projects may deserve careful further scrutiny, for a number of reasons. First, it is important that those to be implemented be either highly profitable or serve as a genuine nucleus for secondary devel- opment, in the sense of providing the basis for a large local downstream processing industry which would absorb a large portion of the output and would, because of the proximity to the raw material, enjoy a comparative advantage over the same processing industry elsewhere in Yugoslavia or abroad. Second, the upward trend of all raw material prices which developed during 1973/74 may well not continue; thus the long-term profit potential may be less impressive and less certain than the short-term analysis might suggest. Third, physical availability of a mineral resource is, in isolation, not a sufficient condition for their exploitation unless justified in terms of economic return. 234. The aforementioned caution with respect to an overly strong emphasis on basic industries and a corresponding neglect of light industries rests on the assumptions that (a) the total amount of investible funds is rigidly limited and (b) that the funds are completely fungible by autonomous choice of the Republic. Both assumptions are not necessarily realistic in each case. In the extent that the development of basic industries serving the interest of the country as a whole could be accomplished in addition to what the 1/ Compare paragraphs 204 and 207. - 119 - R. nihl I if fon rd from thP f innnciI resourcs at its disposal 1 they would unquestionably make a very valuable contribution to development. 235. Another likely reason for the emphasis on basic industries is the "inan inusr prblm whc evr -eAo or conr is __kI A k- - -^ fan mc ng hich, isc a latecomer in the process of industrial development while being exposed to competitive marke codtos0h,a nacmuae nutilko-o and expertise, extending to all areas (like plant layout, product design, production management, marketing) provides for a poor stiarting position and creates a high risk of failure. Basic industries seem to offer the most easy solution. Production facilities are generally assumed to incorporate the latest stage of technology, provided by the suppliers, the requirements for scarce high-skilled and professional caders are (per unit of investment) lower, and product design, production control and marketing problems 2/ are generally more easily manageable. 236. In the Yugoslav context, these considerations inevitably lead to the comparison with the "Slovenian Model", 3/ the most impressive success story in Yugoslavia's post-war industrial development. It certainly does not rest on the development of a broad capital-intensive basic industry but rather on the emphasis given to technologically advanced processing industries and skillful adjustment to the rapidly changing and expanding markets for a wide variety of final goods. The comparison of the woefully inadequate state of Macedonia's engineering industry is particularly telling in this connection. While the development of Slovenia may not provide a simple blue-print for any other region, there are certainly some lessons to be drawn. In any event, to mobilize the acquisition of advanced industrial know-how is a matter whic-h woild deserve hfih priority for future industrial development of Macedonia. 4/ 1/ Compare Chapter E.1. 2/ However, as mentioned before, if prices of industrial raw materials are linked to fluctuating world market prices; thus, the reduction of the technological risks may be counterbalanced by price risks unique to raw materials. 3/ Slovenia Is the industriallv most advanced epoublic of Yu2cslavia. n/ Comnae C!1apte1r F. 1 4. Tertiary Sector 4.1 The Role of the Tertiary Sector 237. The following figures show the contribution of the "tertiary" sec- tor to the total GMP of the Republic. Table 83: ROLE OF THE TERTIARY SECTOR % of Labor Force % of GMP 1973 1971 /1 Economic Construction 11.1 5.5 Transport and Communication 6.0 2.8 Trade and Catering 20.4 5.8 Handicraft 2.9 7.1 Non-Economic Education Excluded .7.0 Healt " )5.0 Others (administration, " ) banking, etc.) 33.2 I ResLUent a lbor force. Source: Statistical Yearbook Yugoslavia 1974, Tables 2 204-7. 238. Since all tertiary activities 1/ produce essentially non-tradeable goods and services, with the exception of tourism, the ratio of labor force engaged in these activities to population indicates the comparative level of local availability of these goods and services. 1/ Cnntrarv to common practice. construction and handicraft are. for rea- sons underlying the subsequent discussion, included into the tertiary -sctr 4'. - 121 - Table 84: LABOR FORCE IN TERTIARY ACTIVITIES, 1971 (per 1 ,000 inhabitants) Macedonia SFRY Macedonia/SFRY Contrutio -19.4 19.8 9 Transport and Communication 10.0 16.2 62 Trade and Catering 20.6 24.8 83 Handicraft 25.0 19.7 126 Economic Tertiary Activities 75.0 80.5 93 Social Services 24.3 25.4 96 4~ / I r I n r_ Other Services 14.4 I.1 95 Non-Economic Tertiary Activities 38.7 40.5 94 Total 113.7 121.0 94 Source: Statistical Bulletin 700 (Census, March 1971). The figures illustrate that Macedonia is close to the Yugoslav average in economic as well as non-economic tertiary activities. 239. As to fixed assets in tertiary activities, the following figures (per canita) are reported for 1972. Tabhlo R5 FTXED ARSETS PER CAPTTA TN TERTTARY ACTIVITIES. 1972-i (Din) Macdo-ni SFRY Macedonia/SFRY Construction 921 1,689 55 Transport and Communication 2,451 3,543 69 Trade and Catering 1,088 2,203 49 Handicraft 146 190 77 Communal Public Utilities 366 610 60 Economic Tertiary Activities 4,972 8,238 60 Non-Economic Tertiary 1,782 2,092 85 Total 6,754 10,330 65 /1 Social Sector only. The absolutes are--as in every case of fixed asLset--L q s i ut tI oes probably not affect the relative differences between the regions. Source: Statistical Yearbook 1974, Tables 209-3, 210-3, 211-2, 212-3. - 122 - Per capita endowment in tertiary activities shows, in contrast to the labor force camparison a signifiant all discran of similar magnite 4 -f as the per capita income disparity. The corresponding discrepancies for each specific activity inAL LLL JJLUUcLLV.Lt , adIU LLL qua.Li.y Lf L .rY goods and services may not be at par with the Yugoslav average. 240. It is evident from the foregoing tables that the tertiary sector is not only important as a provider of goods and services essential for economic development and for the social standard and the "quality of life" of the people, but also as a major provider of employment. However, its potential for growth is linked to the size of the primary and secondary sectors which generate the financial means to sustain and to expand the tertiary sector. This can be seen from the following table. /1 /2 Table 86: RATIO OF LABOR FORCE- IN TERTIARY ACTIVITIES TO EMPLOYMENT- IN PRIARY AND SECONDARY ACTIVITIES, 1971 (Percent) Macedonia/SFRY Macedonia SFRY (%) Construction 24.8 21.7 114 Transport and Communication 12.8- 17.6 73 Trade and Catering 26.4 28.5 92 Handicraft 32.0 23.6 136 Economic tertiary activities 96.0 91.4 105 Non-economic tertiary activities - 50.5 50.1 101 Total 146.5 141.5 104 /2 Social Sector only. Sources: Statistical Bulletin No. 767. The figures show that the role of the tertiary activities as provider of work opportunities (in both private and social sectors) dependent on the social sector primary and secondary activities is in Macedonia similar to the Yugoslav average. This seems to support the hypothesis that the ratio may also have a good deal of validity "at the margin", and that each new job generated in the modern primary and secondary sector may indeed generate at least one new job in the tertiary sector. 4.2 Construction and Housing Overview 241. The following indicators highlight the main features of Macedonia's construction sector: - 123 - Table 87: SELECTED INDICATORS OF CONSTRUCTION AND HOUSING 1973 Macedonia SFRY Share in GMP 11.1 11.0 Share of individual sector in GMP of construction 13.0 15.3 Share in social sector employment 16.9/1 15.6/1 Shares in construction work done (value): For social sector 78.0 72.3 Fnr private sectnr /2 22.0 27.7 Residential buildings 37.7 44.1 Housing units completed: Per 1,000 inhabitants 4.8 6.5 -_r en ... * , . . -, 1 ,,4- 64 7 r1r, 0 Perentprivate ownerhp6-7 6. Size (m2 per unit) 54.5 50.5 HousIng stockl: Persons per unit 5.0 3.9 F.loor space (m2) per LCapita. 10.9 12.9 Percentage of dwellings with electric installations 92.4/3 87.8/3 /1 1972. /2 More than 90 percent for residential purposes. /3 1971. Source: Annex Table 51, Statistical Yearbook SFRY, 1974, Tables 210-6 and 210-9. 242. The share of the construction sector in GMP (11.1 percent) shows that actual production responded favorably to the improvement of the physical infrastructure (including housing) of the Republic. About 17 percent of the labor force is employed in this sector. The role of the individual sector within the total construction sector appears small. However, most of the pro- duction of individual sector producers is for private housing, so that in this particular subsector individual sector producers probably account for one-half to two-thirds of the total output. 243. As the share in "construction work done" indicate, the social sector accounts for a little over 78 percent of construction demand. The private share in total demand is all but completely for residential construction; conversely, about two-thirds of all completed residential units are privatelv owned. However, in terms of the number of residential units completed per canita, Macedonia lags behind the Yugoslav average. 244. Av!ilabl d1aa .4th Yrvela n persona per dwelling and floor space per unit do show a fairly close similarity between Macedonia and the Yugoslav average. Available floor Space per person is low in comparison wit h. Condi AAt iAoS in high income countries. But this is obviously not the result of "over- crowding" o exIsting units but rather of the small average size of housing units and larger average family sizes. Issues for Future Develooment 245. Non-residential construction (accounting for around two-thirds of the total) develops largely in response to the overall development momentum and strategy of the economy. However, a different situation exists with respect to residential construction. Macedonia still has a severe deficit in housing. Beyond its direct impact on the standard of living, it has a detrimental indirect effect on the process of growth and employment generation. The shortage of housing reduces the mobility of the population, and prevents some job seekers to accept jobs where they are available and cannot be filled. The promotion of private residential construction would be particularly bene- ficial, for two reasons. First, demand for private housing construction com- petes essentially with goods and services (like private cars, consumer durables, travelling) which are not provided by the Macedonian economy. A stronger di- rection of private demand towards residential construction--which contains a very high local content of goods and services (and ultimately labor)-- would reduce the "leaka2e" of growing demand out of the Republic, and it would boost the local economy through its high multiplier effect. Second, while nihlir- rqiintinl construction comnetes with economic investment for socially-owned investment resources, private residential construction could be largely financed from private savings which can only to a limited degree be mobilized for channeling into economic investment. At any-given level of total ..~ residnti-n conrc tion,~1- at s~trongr, -nlp nf nr4x7Att- rpsidential owner- ship, thus, could conserve scarce financial resources for productive invest- ment for economic growth. This potential for redirecting prIvate derand could be stimulated by promotion of special savings schemes tied to residen- tia] construction. 246. On the supply side, it also appears that there is some room for promotional policies, in particular with respect to individual producers. Most of all, the promotion of voluntary cooperation between the generally small and specialized individual units would enable them to take on larger -1~ ~ - _ fc J --_,I A and more complex projects, and to carry them out more efficiItLLy. A to credits would play a crucial role in this connection, in two specific functions. First, even small investment in tools and equipment can in this sector have a great impact on productivity. Second, carrying out complete construction projects generally requires a good deal of intermediary financing of the work in progress by the contractor. Further, the individual construc- tion is probably one of the most promising activities for workers returning from abroad who are willing to invest their accumulated savings for productive purposes. 4.3 Transport and Communication Overview 247. The Republic of Macedonia is, due to its geographical position, a major traffic link in the Balkan Peninsula since all transit traffic between Central Europe and northern Yugoslavia, Greece and the Middle East passes - 125 - through Macedonia. Furthermore, East-West is the natural link in the connec- tions htwien Bllgaria, Romania and Albania which presently do not carry much traffic but could increase in the future. 248. In 1973, transport and communications sector accounted for 6.9 percent of M-acedonia's GP and for _aout 6 percentc of employment in the Social Sector. Major activities are road transport (62 percent of the GMP of the C!ec'or\ r 1. ------- I L I _L1L _J /IUJL..LL n. Secto) rLlways% (271prceUn) and commtr unications (,10 percent). COITMUNICATION AVAILABILITY, 1973 Macedonia/ Macedonia SFRY SFRY (%) Population density (per km2) 66.3 81.9 81 Piuped rnds (K'm ner 10 km2) 76.9 97.0 79 Unpaved roads (Km per 1000 an2) 156.0 30.0 195 Regular gauge railways (vm per 1000 i) 25.0 h0.0 63 Road transport: passenger kn per inhabitant 851 1001 35 fre6h1t ton kM. per i1"habitant 259 15 Rail transport: passenger km per inhabitant 216 507 43 L.VL1 N1Il Pt;:L L.UL"U.LLaLLL ;1j 1.7I Transportation: GMP (Din) per cap., all modes 626 1130 55 GrP (Din) per cap., railwavs 159 264 ou G11P (Din) per cap., roads 362 413 87 Communications: CMYP (Din) per cap. 55 144 33 Source: Statistical Yearbook Yugoslavia, 1974, Tables 211-1, 211-12. Annex Table 52. 249. Due to the topography of Macedonia the population is more unevenly distributed than in the Yugoslav average. Therefore, the comparison of the ratios for paved roads and regular gauge railways per unit of surface may somewhat exaggerate the deficiency of the major transport network. The data for transport volume and GMP suggest that road transport is the major mode of transportation, and that the road system carries a traffic volume not significantly different from the rest of Yugoslavia, whereas railway trans- portation is much less important. The ratio for communication indicate severe deficiencies in Macedonia. Roads 250. In the 1940's there was not a single kilometer of paved road in the entire Republic. After the war, food production, railway communications, industry and housing had initially the highest priority, and only around the mid 1960's the RAnublic started to give greater attention to the development of its road network. This change of emphasis is illustrated by the increase in pnd±turor for road warsl adrtead whn" ntih nnn Tn tqh - n raci onvP- opment program from 1966-70 was adopted which resulted in the construction of 162 km of new roads and the improvement of other interurban roads through major r i eUL LLI PeL.LUo 17- th planned to construct a total of 568 km of new roads (Categories I, II and III) at an estimated cost of Din. 2u mill.on, and by the LU o 197 / about UV "U 1aU UmL h1 J.Leted. During the same period, Category IV roads with a total of 676 km were planned with an estimated cost of Din. 327 million. The following table gives the breakdown of expenditure for the construction and maintenance of the road network and the source of funds. Table 89: FINANCiNG OF THE ROAD CONS TRUCION PRuAM Iil-74 Din. million A. Construction of Categories I, I and III Roads Republican Road Fund 245.5 Contribution to the Republic 298.3 Contribution of the Connunes 28.0 Federal Fund for Underdeveloped Regicns 114.3 Foreign Loans 140.0 Total 826.6 B. For Maintenance of Road Network 198.9 C. Construction of Category IV Roads Contribution of the Republic 41.3 nr.~huio-n~ by Communes and working organizations 104.7 Total 146.0 Source: Republic Secretariat frTasotto 251. According to a Federal legislation 1/ which took effect n 197 , road Categories I, II and III have been reclassified into Magistral (Cat. I), Regional (Cats. i and III) and Local (Cat. IV). The FederatiOn is responsi- ble for Magistral roads, with Regional and Local roads being the responsibil- ity of the Republics and Communes respectively. 2/ The physical planning and administration of the road development program of Macedonia is handled by the Republican Road Council--which replaced the Republic Road Fund. 3/ It is headed by a Secretary. The professional staff consists of 22 engineers, 3 economists, 4 lawyers and other technicians. The investment resources di- rectly available to the Road Council originate from earmarked taxes. The following figures are reported for 1971-74: 1/ 'The Basic Law for the Security of Public Roads." 2/ For the breakdown of roads by categories and quality, see Annex Table 52. 3/ And is further expected to be replaced by a community of interest for roads. - 127 - (Million Dinars) Earmarked gasoline taxes 153.5 Earmarked road tax 76.1 Earmarked foreign vehicle tax 5.9 245.5 A major problem for future development is the expansion of the local road net- work in order to provide year-round all-weather communication with the less developed communes and settlements. Railways 252. The Republic has its own Railway enterprise (ZTP). Macedonia's ZTP works in clns cnnnpertion nrd cnnri-nntio-n with the fnir nthe-r rn41yj ent-7 prises of Yugoslavia and ranks third for both freight and passengers (after thos se n S plus Montenegro and Croatia). As in other pat Yugoslavia, rail transport has lost ground substantially against road trans- ports both in paener and freg se - rvice. Thile 4 n 1 0 7ra l4 wys- ac counted for 31 percent and road transport 56 percent of GMP in transportation, Uy .17J Lhe LLL.LVe sLIrLe o. L<LkWaLys Ue..L.LJieU to 271 peLrcent while that of roads increased to 62 percent. These losses in market shares were accompa- nied by unsatisfactory financial results of ZTP. Rates for both passenger and freight service were fixed at unsatisfactory low level. This policy is now being revised in order to enable ZTP to achieve a more accumulation. However, as a result, ZTP may lose additional shares in both passenger and freight service in spite of the more severe impact of rising energy costs on road transportation. 253. In addition to--and in connection with--the railway system faces three structural problems: (a) an insufficient and partially overaged rolling stock, (b) a rail system, including communication, in need of overhaul and modernization, and (c) the existence of some uneconomic links. As for future development, these problems will need and will probably receive primary atten- tion. Plans are also reportedly being discussed for the extension of railway links each to Bulgaria in the east and to Albania in the west. 1/ 1/ To the west, the narrow gauge and uneconomic link from Skopje-Titovo- Gostivar-Kicevo-Ohrid and Struga, which serves less developed and touristic areas, was replaced by modern line un to Kicevo, and plans are to expand it to Ohrid, Struga and the Albanian border (about 82 km). To the east the section Skopje-Kumanove-Beljakovsk was completed and the remaining section to Gujecevo in Bulgaria amounts to 55 km. 4.4 Handicrafts Overview 254. The Handicraft sector comprises organizations which are involved in production of goods, in maintenance and services and in trading, and often in a combination of all the three. The production or service activity may coincide or overlapmwith "small industry" or with "construction" or with both. Further, in both production and services some, activities are an essential supplement to economic development, whereas others are-remnants of an outdated economic structure. While lack of the former hamper economic development, the latter rather constitute a burden. 255. In 1973 handicraft accounted for about 2.4 percent of total GMP of Macedcaia, and the individual sector's share within handicraft was about 60 percent. GMP and employment in the individual sector are probably seriously under-reported. No statistical information is available which would permit an assessment of the respective size of the (expanding) "modern" and the (declin- ing) "traditional" segments. The social sector largely falls into the modern segments, and the traditional segment largely consists of privately-owned shops (the average establishment size of 1.5 workers per unit supports this assumption); but a simple correspondence does not seem to exist between modern and socially-owned, or traditional and orivatel-owned handicraft unit. The following table gives some indication of the role of the handicraft sector: Table 90: ACTIVE PERSONS IN HANDICRAFTS, 1961-71 Percentage ir ResRidRnt Per 1,000 Population Labor Force 1961 1971 1961 1971 Macedonia 15.6 24.3 3.9 6.9 LDR1 2.6 1..8 30 A. DRs 24.3 24.6 5.0 5.4 Yugoslavia 20.4 21.1 . 5.2 Source: Statistical Yearbook Yugoslavia, 1974, Table 202-5. 256. The relative size of the handicraft sector is in general positively correlated with the level of development, in the comparison of the regions (for a given year) as well as within each region over time. However, Macedonia falls clearly outside this pattern; the size of its handicraft sector is com- parable with that in the most developed parts of Yugoslavia. There is probably an upper limit to the relative size of the handicraft sector, determined by demand (related to G11P per capita). However, it is questionable if any region - 129 - of Yugoslavia is approaching this limit, and--as the relative shares of han- dicraft in GMP show (2.5 percent for the LDRs including Macedonia, and 3.3 percent in the DRs in 1971)--the potential for expanded production is prob- ably largest in the LDRa. 257. All shows that the handiCraft sector is presently poorly balanced for making significant contribution to development. In modern handi- crafts, the capacity is insufficient to provide those goods and services to the economy or to private households which only small specialized and flexible units can render effectively. The traditional handicrafts are comparatively strongly represented in Macedonia, but mostly are associated with destitute economic conditions under the threat of extinction. Outlook 258. The role of the handicraft sector is to a growing degree being recognized. The sector--frequently being referred to in Yugoslavia as "the minor economic sector"--performs functions supplementary or peripheral to the major economic sectors which the latter cannot or not efficiently assume itself, like repair and maintenance of minor productive equipment, housing and consumer durables including road vehicles, and a variety of minor to-order works. The absence of such productive services causes economic disruptions and social costs which are not measurable but in all likelihood very hith. Reportedly the existing capacities in this field are woefully inadequate. Furthermore, this sector creates on the average higher employment and higher income per unit of capital than the major economic sector, particularly in comparison with the basic industries. 259. It is also being recognized that the indiv-,idual sector could play an important role. An interesting new departure pertains to the application of the coonprative cncept to handcrafts, presently being discussed. This innovative concept could create important economies of scale--particularly- throih pooling of procurement, marketing, i m contract work, access to credits and cooperative arrangements with the social sector-thin the legal c ants of size of private establ4shments. 4.5 Tri4cm 260. acedonia's natural beauty, an attractive climate and picturesque mountains, the traditional hospitality of the people, combined with favorable prices of services offered have been an encouraging factor for the increase in tourist activity. In addition, the thoroughfare position of Macedonia jetween central Europe and Greece and Turkey generated a high volume of road connected transit tourism. The number of night lodRines at hotels increased for the period 1963-74 by 15 percent per year for foreign tourists and 7.4 percent for domestic tourists--the number of Dec capacities in ditterent - 130 - tourist accommodations 1/ increased from 7,647 in 1963 to 37,054 in 1974; during the period 1971 to 1974 alone the hotel capacity was increased by 5,000 beds at total investment cost of Din. 650 million. 261. The high rates of growth, no doubt reflect the rapid expansion from a small base and cannot be expected to continue indefinitely. During 1974, the slackening of tourism demand originating in West Europe and the political events in countries to the South and Southeast of Macedonia (both affecting transit tourism in particular) caused a setback in Macedonia where the number of tourist nights of foreigners dropped by about 7 percent. However, tourist ParninvR did rpnortedlv continup to increae in 1974. 262. The 1-risct sc nh 7nt been ful 1 y delponed ypt nnd has tn potential for some increase in two directions: extension of the time spent in Macedonia by transit tourists and increase of the number of tourist visitors. At present, summer tourism is concentrated in the greatest part around the lakes (Lake OCh rid A, LTake 'Prespa, Lake Dojr an, an, L avrov d spas. A small volume of winter tourism takes place in the mountain areas in Northwest MadUUi. alU y-rLLUUU (buusLness or transit tourism) in SIKopje. ToULLst activity is still in its infancy in other parts of the Republic. 263. For further development of the sector, a Committee for Tourism has been founded. it prepared a regional plan for the development of tourism for three areas in the Southwest: the Communes of Struga, Ohrid and Resen, cater- ing particularly to an increasing number of foreign tourists and excursionists. A regional Aerial Plan for Tetovo, Gostivar, Debar, Krushevo and Gevgelja has also been made. 2/ Local tourism will be expanded particularly in the hill resorts, and efforts will be made to lengthen the tourist season. A study of long-term tourism potential in Macedonia 3/ envisages a total of 140,000 bed capacities by 1990, of which 64,000 beds in hotels, motels and similar accommodation. Local tourism will be expanded particularly in the hill re- sorts. In addition, efforts will be made to lengthen the tourist season. 4.6 Education 264. A major effort has been made after the Second World War to improve and expand the educational system. School facilities have been expanded at a rapid pace in accordance with rapidly increasing enrollment. Changes in curri- cula, organizations, financing and teacher training have resulted in a pheno- menal improvement in terms of both quality and quantity of educational services provided. The result of this effort is illustrated by the following table: 1/ Comprising hotels, motels, inns, tourist settlements, spas, hostels, camping sites and private accommodations. See Annex Table 53. 2/ A regional Aerial Plan for the whole of Macedonia is currently under preparation. 3/ Macedonian study "Market Opportunities for Long-Term Tourism Development of the Socialist Republic of Macedonia." - 131 - Tabl, 01 VDrNTr TTI TLERDAT'EC; 1V Ar ROTTD C.tLU J I .±.A.,.~ L JL J MJ±, 4. f'4 SAJJ.. Macedonia Yugoslavia Ae 196 19117 10-19 5.1 4.0 3.1 20-34 16.5 5.4 5.2 35-64 40.1 29.3 21.6 65 + 62.6 65.2 42.8 Total 24.5 18.1 15.1 Source: Statistical Yearbook, Yugoslavia 1974, Table 202-4. It is clear from the above table that the present difference in illiteracy rate between Macedonia and the Yugoslav can be traced back to the age grouD above 35 years, i.e. it reflects past rather than present deficiencies. The sharp decline in the illiteracy rate, particularly in the 20-34 age group, shows the effects of the rapid improvement of the school system achieved during the 1950's and 1960's. Orzanization of The Educational System 265. Education for pre-school children from the age of three un to primary school age, which was neglected in earlier years, began to develop morn ian4iclu di74ng the recent years. Primary education Is compulsory between the ages of 7 and 15. After completion of primary education, quali- fied students can select f-ro a e of seconda educational programs Universities and other institutions of tertiary education offe-r qualified - secon. .dary schLOOl. graduates the opportunity for advanced degrees and" special- ized training in many professional fields. 266. Most of the primary school leavers, particularly in urban areas, con- L..1UU~ LLLLUU ,l bl-cUULUcLLY CUUCULUL J.IL VCLL1.UUZ1 IIUU.Lt C.LLIlt--L PLUV.LUJ.LL6 r AI~d. education, technical education, or vocational training. In addition, secondary education includes a number of specialized programs such as art schools, special schools for the retarded, and adult education centers. All general secondary schools ("2gymnasiums") provide four-year curricula oriented toward either the social sciences and languages, or the natural sciences and mathe- matics in preparation for tertiary education. The specialized schools in secondary education prepare pupils for careers in fields like business and commerce, medical assistance, forestry and veterinary medicine. The Schools for Skilled Workers offer training for various industrial trade and skills; the length of training varies from two to three years depending upon the require- ments to acquire the respective skills. Recently the secondary school system has been modified with the introduction of a two-level education program. The first level consists of two years of general secondary education. There- after a student may decide to join the labor force or to continue schooling. - 132~ - For the second level, the students could choose from several fields of specialization (general, technical or vocational). 267. The responsibility for control and financing of the education system rests on the communal level. It is organized in self-managed "Communities of Interest" for education which can comprise several communes. They mobilize most of the required financial resources from their members (working organiza- tions and/or citizens) which can be supplemented by contributions from the communal budgets; subsidies from the Republic play-a major role only in the poorer regions. While this decentralization of the edudational system has generated more local participation in the educational process and policies, it has also brought many problems. Many communes for example, do not have the financial resources and in some cases not the enrollment size for the develop- ment of a diversified school system. Universities and other higher institu- tions offer free education. In addition, a great number of scholarships are granted by the economic enterprises to qualifying secondary school graduates, usually resident in the same commune, frequently with the obligation to work after graduation for a specified period of time with the granting enterprise. Primary Education Table 92: GROWTH OF PRIMARY SCHOOLS, 1961/62-1971/72 1961/62 1965/66 1971/72 Pupils (100v's) 291 297 263 Schools 1,474 1,426 1,388 Teachers 8,105 9,053 10,931 Pupil/teachers 31 28 24 Source: Statistical Yearbook Macedonia 1974, pp. 226 and 228 268. The above table shows an impressive _impLUVmt:!1L L qUCa.L.y, expressed in the pupil/teacher ratio, which dropped to 24 in 1971/72 from 31 in 1961/62. The presant ratio is almost equal to the Yugoslav average of 23. The almost stable size of primary school enrollment does reflect a complete absorption of the 7-10 years age group into the school system. But tfere are still sizeable gaps in the enrollment of age group 11-19 as the following figures indicate. Table 93: PRIMARY SCHOOL ENROLLMENT RATES, 1970 Age Macedonia Slovenia 7-10 96 99 11-19 77 94 Source: Some Indicators of Development in Yugoslavia, 1950-70; Belgrade, 1971. The increasing difficulties to raise the enrollment rates in the 11-19 a2e group reflects the low population density, the topography and the scarcity of resources of the poor and mountainous communes of the Republic. Many of the smaller schools offer only the first four classes of primary education, and an extension to an eight-year curricullm is nnt fesihle in view of the additional requirements for facilities and teaching staff and the limited number of pupnils_ in uillagea scphools ia h-aeas of loTw popultn denity Secondarv Education . 269. Secondary school enrollment and facilities increased Substantially1. - ~JJ..L~J4 ~ a..LU C~...L.. ~ LiL LC~~U ~ UO LCIL1.Ld&J..Ly during the period 1961-72. Table 94: SECONDARY SCHOOL PUPILS AND TEACHERS 1961/62 1965/66 1972/73 Students (1000s) 37 58 67 Teachers 2,070 2,500 2,590 Students/teachers 18 23 26 Source: Statistical Yearbook Macedonia, 1974, p. 220. The enrollment ratio in the respective age group (15-18) increased from 26 percent in 1961/62 to 42 percent in 1972/73. The comparative ratio for all of Yugoslavia was 39 percent, however, for Slovenia it came to 47 percent. And while enrollment increased by 81 percent between 1961/62 and 1972/73, the number of teachers increased by only 44 percent. The pupil/teacher ratio, thus, deteriorated and was above the Yugoslav average of 23. 270. Major shifts in the composition of secondary education accompanied the growth of the secondary education system. - 134 - Table 95: SECONDARY SCHOOL ENROLLMENTS BY TYPE OF SCHOOL (percentage of total enrollment) Macedonia Yugoslavia 1961/62 1965/66 1972/73 1972/73 Srhnnl fnr-skilled wnrkPr 30 30 34 41 Technical Schools 39 23 29 30 Teachers training 1 3 1 1 Gymnasiums 30 44 36 28 Total 100 100 100 100 Source: Statistical Yearbook Iugoslav-ia 197/1, Table Statistical Yearbook Macedonia 1974, page 220. These changes, however, have not always been in line with the demands of the economy, resulting at times in serious surpluses or deficits in certain categories. Gymnasiums for example, experienced substantial growth during the first half of the decade, a phenomenon which can also be observed in other parts of Yugoslavia. Several reasons caused this rapid increase. First, in the effort to provide secondary schooling for the largest possible number, gymnasiums were often expended or newly established because they were least costly in staff and equipment. Second, the number of pupils qualifying for secondary education was on many locations insufficient to have more than one secondary school. And third, there was an increasing awareness of the In- dividual benefits from tertiary education for which graduation from gymnasium generally is the prerequisite. 271. The result of this development was a surplus of gymnasium graduates at a time when the economy was in urgent need for workers trained in specific skills. To correct this situation, almost all funding, investment and atten- tion has. since the middle 1960's, been oriented toward the development of schools for skilled workers and technical schools which had experienced only minor growth during the first part of the decade, by 1972/73 students in these schools comprised nearly two-thirds of all secondary school enrollments. Tertiary Education 272. The tertiary education system in Macedonia consists of 10 two-year "high schools", 9 fouryear "hIgher schools", one art school/academy, and the University of Skopje. 1/ As with all other levels of education, tertiary 1/ Both "high schools" and the "higher schools" have a stronz vocational orientation as compared to the University. In general, the various types are alternative rather than sequential. education experienced tremendous growth over the past two decades. Enroll- ments are presently more than ten times higher than they were twenty years ago, with the university containing more than three-quarters of total enrollment. Table 96: TERTIARY EDUCATION ENROLLMENT (in 1,000) 1964 1970 1973 Art academy - - - High schools - - 2.9 Higher school 3.2 5.8 5.3 University 6.7 24.3 28.8 Total 9.9 30.1 37.0 Source: Statistical Yearbook Macedonia, 1974, p. 226. The expansion of high and higher schools was propelled by two considerations. Firs,[q, provide access to less expensive form of tertary education to a larger number of students; since housing of students is a major problem, satial decentral4zation was a-vius route. Co n d -,atial dcntra- ization was again the route to offer maximum access. And third, the need was felt for educating technicians andI admiisraor in-- larg nubesorpoi J..L. AiL ~ LLL1~L.~LLiLJL...djJ. ~LiU~U1LLL.L1> I.dLU L L JI ±LL z UUL~ ~ U tions which do not require a strictly academic curriculum. Education and Manpower 273. Another aspect of education is the degree to which the education system matches the manpower requirements for the development of Macedonia. The present aggregate imbalances of manpower requirements and actual manpower by skill (education) categories are shown below. Table 97: MANPOWER SURPLUSES AND DEFICITS, SOCIAL SECTOR: 1972 (as percent of "required") Category Macedonia Yugoslavia High professional education -15.8 -22.2 Higher professional education - 7.2 -19.1 Secondary professional education - 6.3 - 9.2 Lower professional education 27.8 69.7 Highly skilled workers -16.7 -29.3 Skilled workers - 9.6 -11.8 Semi-skilled workers - 2.6 - 8.6 Unskillad workers 27.3 65.5 Sourc St Yearbok Yugoslavia, 1974, Tables 203-7- ?03-R I Iru The figures cannot be interpreted as measuring accurately surpluses or shortages. The 'real' imbalances on a disaggregated basis may be much more severe than the aggregate figures suggest since horizontal mobility is very limited, particularly in the specialized education categories. On the other hand, some vertical mobility is possible within activities; functions are carried out in spite of educational deficiencies although this may affect productivity to an unknown degree. Keeping these reservations in mind, the figures show that Macedonia has accomplished a significantly better matching of required education than most other parts of Yugoslavia. 274. However, because of the limited horizontal mobility and the need to supplement formal education with on-the-job experience, the tendency toward aggregate balances can well be accompanied by serious specific imbalances. In all likelihood deficits in specific categories may persist; they would --as a departure from the past--be accompanied by the emergence of sizeable surpluses in other categories, and the possibilities to rectify the imbalances by some form of remedial education are limited. The Plan has acknowledged this problem and requests specifically that attempts will be made to adjust the structure of the education system to the mannower reauirements. 4.7 Public Health and Health'Insurance 275. During the past two decades,substant-ial gains have been made in the field of public health and health insurance. New hospitals, health centers and health facIlitIes have been opened, increasing and Improving the services available, and the health insurance program has expanded its range of services and has been extended in coverage. ./U L~L Ihe 'eath syste is orga U A. .L 1 Ized within the social sector. It con- sists of two independent parts: public health and health insurance which are currently integrated under self-managing communities or interest. Public health organizations comprise hospitals, medical and health centers, clinics, institutes, etc. In 1973, there were 16 hospitals and 198 other health or- ganizations. In 1971, large advances were made in the sphere of health in- surance. Health insurance ceased to be a part of a single system of social security and separate regional self-management communities of health insur- ance for workers and for agriculturists were formed. At the same time, ob- ligatory forms of health care were introduced which provided free health services for all insured and uninsured persons under 15 years of age. In accordance with the new Constitution, new self-managing communities of interest for public health and health insurance were formed in 1974. These are made up of delegates of both the contributors (and beneficiaries) and the suppliers of health services. The communities of interest decide on the size of the contributions to the insurance system--mostly by deductions from personal incomes and from contributions from working organizations and from self-employed private individuals--and on the levels of services provided. Where local funding is insufficient to meet minimum standards, additional funding is possible from the Solidarity Funds of the Republican community and the regional communal communities and from budgetary resources. 277. Virtually the entire population is provided with health care through their direct or indirect insurance coverage (special health care is also pro- vided for treatment of infectious diseases, pregnancy and delivery, and for pre-school age children and children attending schools). The complete obliga- tory health insurance provides--in addition to the previously mentioned ser- vices--for diagnostic examinations, ambulant treatment,'hospitalization and treatment and many other services, 1/ related transportation costs, medicines and dental work. During the temporary inability to work due to sickness or to maternity leave, as well as during short working time, the health insurance program provides compensation for income loss (80 to 100 percent of the average personal income earned in the preceding period). 278. AR regards individual farmers who are not covered by the complete obligatory scheme, they are provided with health care with certain charges for xpenses incurred. Resources necessary to cover the exnne of the health care of insured farmers are provided by these agriculturalists them- selves through the payment of contributionstocommuni tiesof h1alt iu- rance. 2/ Measures are being taken to extend equally complete health in- surance coverage to all farmers. Present Standard Of PZUb.L.Lc elt.Li The present status of public health in Ll Republic can best be seen from the following indicators: Table 99: INDICATORS OF PUBLIC HEALTH, 1972 Macedonia SFRY Macedonia/SRY (%) Infant mortality (per 1000 live births) 70.2 43.3 62/1 Inhabitants per hospital bed 199 180 91/1 Inhabitants per doctor 2,696 1,471 55/1 Health workers/1000 inhabitants 15.6 12.4 79/1 Health system assets/inhabitant (Din) 343 419 82 Doctor visits/inhabitant 2.5 3.0 83 Inhabitant/ambulance service unit (1000) 5.5 5.5 100 Insurance payment per insured (Din) 572 948 66 /1 Inverse ratio. Source: Annex Table 54. 1/ Orthonedic and other aids, necessary equipment and clothing for newborn babies, reimbursement for funeral expenses and death benefits. 2/ The amount of these contributions is established by the communities of public health and of health insurance and are paid from personal income derived from cadastral receipts and from other sources. - 138 - The figures illustrate that--in spite of the progress made--Macedonia still lag considerah1y behind thp nveragp standard of Yugoslavia by almost Pvpry indicator. Several causes underlie these differences. First, and most pre- dominantly, they reflect the difference in level of economic development which makes adequate financing of public health and health insurance difficult and which In turn greatly effects the standard of health care for the rural popu- lation. Second, the terrain of the Republic causes special problems. In the m..ountainous parts of VM-acedni whc are geeal th les develoed-an the poorest, the lower population density and the deficiencies of the micro- transportation system make access to healt 1ener and Lambu.lnc difiu.lt for a considerable portion of the population. A special problem in this context is in the distribution of medical personnel. Many doctors prefer to practice in the more urbanized communities, and there has been considerable difficulty to induce them to work in the rural areas. Efforts are continuing to resolve this problem, though offering high personal incomes and the con- struction of modern housing for medical personnel in health stations in rural areas. Family Planning 280. The institutionalization of family planning in Macedonia as well as in all of Yugoslavia has only slowly developed. The view is widely held that accelerated economic development and social change bring demographic trends automatically and quickly to a socially desirable level without the need or justification for direct action. Thus, there is no specific demographic policy. The fact that the more developed republics and provinces of Yugoslavia have reached a balanced demographic situation without an organized policy, and that fertility has already declined drastically-and persistently in Macedonia have added weight to the view that family planning is not an area of major concern. Statistical data support the hypothesis of the quick and direct effect of economic development on fertility to some degree. However, there seems to be some residual factor at work (as evidenced by the halt of the aec14n after 1970 at a rate of close to 3 and the widespread of crude birth ratios between Communes, compare Annex Map 3) which might well justify a mo-re act-ive promnHnIM of fAmilV p1An-niC. -139 - E. DEVELOPMENT ISSUES 1. Strategy of Development 281. From the preceding description and analyses emerge a number of issues--key problems pertaining to either objectives of development or to policies or constraints related to the achievement of objectives--which are likely to remain relevant for some time to come. This chapter deals with those issues which are not linked closely to and were raised previously in connection with specific sectors, but which affect the strategies and policies for development of Macedonia as a whole. 1/ The subsequent discussion is nPithpr meant to hA nnmnrPhPnsivP nor exhaustiv. nor as a presentation and critical review of official Macedonian views on development strategies and policies. It rather constitutes reflet-ions of thp mission on what it per- ceived to be relevant. Further, most of these reflections apply to every other less developed -e-4on of YugoslAi ps much acn o have relevance for the country as a whole. 282. Macedonia has two major development objectives: (a) The disparity of GMP per capita as compared to the Yugrslav average is unacceptably wide and is closing only very slowly; (b) The absorDtion of the high under- and unemployment, in combina- tion with a high natural rate of increase of the labor force, requires the expansion of opportunities for gainful employment which overburden the capacity of Macedonia. Both major objectives are, for reasons discussed elsewhere, so closely inter- related that they could be assigned equal priority. In comparison with these major objectives, all others appear subsidiary or supplementary. 283. Macedonia's development strategy seems to be on the verge of a major shift towards what is frequently referred to as "broadening the basis for future development". As to the physical infrastructure, its development is unquestionably of high priority. This is particularly evident with respect to transport and communication. The off-center location of the Republic with- in the Federation creates a physical disadvantage which can only be ameliorated by the improvement of the inter-republic transport and communication system. Similarly, the intra-republic disparities of development are to a large degree the result of physical conditions and could be greatly ameliorated by the improvement of the intra-republic transport and communication system. 1/ Given the large and leading role of the industry sector, some overlap of this general discussionwith the issues rase i c with industrial development is unavoidable. -lAn- 284. With respect to agriculture, the strong emphasis on developing the basis is also well-justified. Agriculture--in particular the individual sector--has obviously a large potential for increase of productivity (of land). Its activation has the dual effect of boosting economic growth and of improving the income accruing to the rural population. If the latter can be achieved, it would serve two objectives of development simultaneously. First, it would contribute to narrrowing the income disparity between the rural and the urban segment of society, and second, it would reduce the pressure on the urban-industrial sector for absorbing the under- and unem- plovment which emanates from the rural sector. The ecbiomic and social costs of this absorption--if to be accomplished rapidly and through indus- trialization--would be prohibitive. The economic costs of strengthening the rural sector are probably over a considerable range of action--like improvement of cooperation between the social and the individual sectors, intensified extension service and improved access to credits--moderate as compared to the alternative of integrating surplus labor into the social sector, both agriculture and industry. However, problems of trade-offs are likely to become severe in connection with the ambitious plans for large- scale expansion of irrigation within the frame of the Vardar/Axios River Basin development project. 1/ The main problem is, in addition to the presently unknown but probably very high investment costs, the unknown potential for productivity increase which can be derived from irrigation. The vast economic and social implications of this multipurpose project, presently under study =der the UNDP program, will unquestionably require a rigorous assessment of the nssociated costs and b)enefits witlh recpect to the development of the agricultural sector and to the Republic as a whole. This nssessment is likely to transcend beyond the realm ofapurely techno- economic analysis and requires some fundamental policy decisions on rural versus urban develoWpmeLnt*. 285 Ihe strategy of broadening the basis of development raises some crucial questions with respect to industry (including power). 2/ To strive for self-sufficiency in industrial raw materials is a questionable proposi- tion if stipulated in purely technical terms, i.e. without comparison of the associated costs and benefits, in particular in view of the indirect effects and the alternatives foregone. But given the concern for secure supply, re- duced imports, secure exports and the debt burden, a greater emphasis may be well justified for Yugoslavia as a whole. However, for a particular region within the country, the assessments of costs and benefits take on a differ- ent dimension. For tradeable goods self-sufficiency of a region within a unified national market is not a viable goal; the priorities of the region should rather be geared towards the major objectives of the region--in case of Macedonia the reduction of the income disparity and the increase of gainful 1/ See paragraphs 187-190. 2/ The development issues pertaining to basic industry were discussed in greater detail in Chapter C 3.4. - 141 - employment--which may not be served best through a strategy of self-suff4- clency. This could imply a conflict between the priorities of the country and of the region. However, such an apparent conflict can be resolved by allocating the fungible investment resources of the region according to the regional priorities, and by supplementing them by additional resources earmarked for the development of the raw material basis. Since the benefits of the latter would accrue largely to the country as a whole, the investment resources would have to be provided by the beneficiaries directly, and in addition to those resources which are transferred for the purpose of narrowing the inter-regional income disparity. 1/ The same argument is valid for joint-venture financing from ahroad. 2A 6 Th4s -autin-m manst an o-ael strngm o of the development strategy towards the development of basic activities rests on the observation, +--a 4A anA A-1- -p eA -1- -p *a..' 4 'k-,4- n on4* 4 -n %Fn to be ,I a - presented a_d disc-sed elsewhme that basic activiies tend tbechara- terized by: (a) high capital-output ratios; i.e. the income generated per unit f investment tends to be luw; (b) high capital-labor ratios; i.e. the employment generated per unit of investment tends to be low; (c) low accumulation rates; i.e. the surplus generated for future investment per unit of investment tends to be low. The effects of high capital-output and high capital-labor ratios are amplified if and to the degree investment has long gestation periods, as it is generally the case in any completely new ventures. In these instances the corresponding incremental ratios can be extremely high. The relevance of these considera- tions rests on the fact that the fungible investment resources available are and will remain a major limiting factor to development of Macedonia. On this basis, the fungible resources of the region should be directed towards projects which would generate the highest possible economic growth, employment generation and accumulation. 287. In this connection, three specific analytical problems need mention- ing. First, the capacity of an enterprise to generate accumulation is fre- quently viewed within the concepts used in relation to the income policy, i.e. as the ratio of enterprise income left for allocation to enterprise funds after payment of personal incomes. This ratio is generally the higher, the more capital-intensive 2/ the activitv or the nroduction nrocess. However, since this concept of accumulation rate does, in contrast to the one mentioned 1/ It seems that with respect to "national priority industries" the forth- coming.LZr rive-Year TPLan will tlake a new departure -in- this direction. 2/ This and the subsequent statements on "capital-intensive" applies as a rule to "basic activities" which tend to be the capital-intensive ones. - 142 - above, not link the benefit to the costs (in terms of use of the scarce resource) of its generation, it cannot serve as a guide for allocative decisions. Second, productivity of labor, although an important factor, needs to be balanced against the productivity of capital, the scarcest resource for development. This is particularly important for structural relations. For the same reason as mentioned above, the productivity of labor tends to be the higher, the more capital-intensive the branch or process, but this may coincide with a less productive use of financial resources. And third, as discussed elsewhere, in all less developed regions of Yugoslavia the per unit labor costs tend to be higher than in the developed regions (due to a more narrow spread of personal incomes than of productivity of labor) and the costs associated with the use of financial resources tend to be lower (due to the availability of low interest credits incorporating a large subsidy element). These two factors in combination tend to raise profitability of capital-intensive activ- ities and processes in comparison with more labor-intensive ones. While this higher rofi-bilityv is valid in the finncial anasviq it would be misguidinL if applied for the economic assessment because it may discourage the use of the abundant resource of develop,ment (human labor) while emnrnaing the ise of the limiting resource (investment funds). 1/ 288. As mentioned in connection with industry, Macedonia suffers--in the competiti-Ue pos-ition ithin the Yugoslav economv--from a de-f-rit in accumul- ated technical and managerial know-how. While learning-by-doing is a neces- svy,alhoghc,- fo whti tere is no simple short-cut, the pv- cess of acquiring expertise can to some degree be telescoped in time and at reduced costs through direct participation of: enterprISesfo-tedveoe parts of Yugoslavia and from abroad. The most valuable participation would be of the "joint venture" type, as presently pursued in cUnJuncio.U wi foreign enterprises, that is the package of risk-bearing permanent financial participation and know-how transfer. The fact that established manufacturing enterprises in some of the most developed parts of Yugoslavia are approaching the technical standards of Western Europe, and simultaneously face growing problems in mobilizing locally the work force for further expansion should provide the preconditions for some joint venture type cooperation within Yugoslavia as well. However, to the knowledge of the mission no cooperative arrangements of that kind have materialized as yet. The few existing inter- republic inter-enterprise cooperative arrangements do generally not meet the standards implied above. Frequently the Macedonian enterprises are mere suppliers of low technology components implying little know-how transfer, they gain a secured market outlet but on account of a subordinate marketing posi- tion, and the financing participation is small, provided as commercial credits and bears no risks to the lender. There is obviously a need for a set of policies which would provide sufficiently powerful incentives to stimulate a voluntary joint venture type cooperation within Yugoslavia. 1/ Clearly such policies could not be initiated by just one region but would have to 1/ Compare paragraph 297. 2/ The new principles of planning, incorporating commitments on joint finan- cing which would--for national priority industries--extend beyond the boundaries of the Repub.1c, could automatically Wo11K. in this direction. - 143 be country-wide in scope, and they would have to be perceived as a contribu- tion to the long-term restructuring of the interregional distribution of labor in the Yugoslav economy, to the benefit of all regions. 289. The heightened awareness of the magnitude of under- and unemployment has led to the adoption of a number of specific policy measures which are to encourage expansion of labor-intensive activities. These include (a) the statutory allocation of 5 percent of the Federal Fund resources specifically for labor-intensive activities; (b) the provision of additional credits out of the Repnuhli Fund resources in relation to the number of new jobs created in the least developed communes; (c) a social agreement requiring each enter- prise to employ a certain number of new gradulates; 1/ and (d) a restructuring of the income tax basis (in 1974) whereby the exclusive taxing of the fund 'For personal Incomes was repl by a t i ofgm=n+ both lf enter- prise income (personal income and accumulation) at an average ratio (in total tax assessment) of 60 percent andU 40 percent respectIvely. I-V WLtb the excep.LU V. dL L UL L LLLL.LV.LUUC&.L 04C.~L.1 ULJ=D LL&Uf 290. Wit th exception of agricul ture, teidvda etrde o have a clear role within the development strategy. Measures for promoting the development of the individual sector, specifically in construction, handicrafts and tourism, have been discussed in Macedonia, but apparently no substantive action program has emerged as yet. In the view of the mission this matter would deserve greater attention. Not only can individual sector producers make a valuable contribution in the supply of goods and services to the economy. The individual sector also has the potential to reduce the pressure for employment creation within the social sector through some expan- sion of gainful work opportunities, and at lower investment cost per worker. In addition to the likely lower technical capital-intensity, the financing would partially come out of private savings, competing with either non- economic investment (mainly for private housing and consumer durables) or private consumption rather than with economic investment in the social sector. A special issue is the reintegration of returning temporary migrants, who have acquired the skill, the savings and the motivation for initiating a productive individual activity. 2. Mobilization of Resources 291. Future availability of many components of total investment resources is laralv beyond the control of the Renublic. This is evident for transfers through the Federal Fund mechanism and from the Federal budget, for access ton qunlrq' and financial rrdits from abroad and for access to credits from international institutions and from bilateral sources. Conversely, the scope for active policies for resource mobilization of the Republic is limited to two elements: enterprise savings and private savings. The volume of enter- prie svigs accmuation) is determined Jointly by the income policy and the obligations for pooling investment resources in the context of the Social Plan, both codi fied in "social contracts" and "self-management agreements". 1/ Law for Employment of Young Professionals. - 144 - At any given level of prices 1/ and productivity, enterprise savings can only be increased at the expense of personal incomes. 292. This points to a possibly severe dilemma between two conflicting political goals: (a) to equalize the economic and social conditions with those of the country as a whole; and (b) to set aside the maximum feasible share of the generated income for investment. Only a broad political con- sensus can strike the balance between these conflicting goals. Any shift towards higher accumulation rates would conspicuously widen the present inter- regional gap of the income standard of that segment of the society which is already integrated into the modern sector. On the other hand, such sacrifice would both raise the potential for more rapid growth in the future and for more rapid integration of the low-income segment of the society into the high-income segment through more rapid employment generation. 293. As to the mobilization of private savings, negative real interest rates 2/ may aiscourage those savings which are not held in foreign exchange equivalent or in connection with specific credit arrangements. In the latter area, there seems to be, as discused olswhe,v cnsQider1 srope for the expansion of savings plans associated with credits for acquisition of p riate ho1sQ1Man 294. Three factors affect these deficiencies in the mobliza-tion of savings. First, the banks are controlled by their founders who see themselves predominantly in the role as borrowers. In this perspective, their primary concern is for retaining the interest rates at the lowest possible level. As long as depositors are not equally represented:either within the existing multipurpose banks, or in special depositor-controlled savings institutions, no change is likely to occur. 3/ Second-and interrelated with the first factor-is the widely-held view that the volume of savings is highly inelastic with respect to the level of interest rates. To the knowledge of the mission no empirical evidence exists in Yugoslavia which would either support or invalidate this view. However, the experience of other countries shows that the elasticity, although varying significantly between countries, is generally not negligible. If the same would apply in Yugoslavia, the policy of maintaining negative real interest rates would suppress the total volume of savings. And third, the distributional impact of negative real interest rates is obviously not generally perceived. The level of nominal rates of interest in isolation does not indicate anything about the size and direction of income transfer. While positive real rates of interest 1/ Which, as a rule, are homogenous for the country as a whole for all com- modities which are traded widely within the country and internationally. 2/ The rates of inflation have greatly receded since the middle of 1975, largely alleviating the effects of high negative real interest rates which had prevailed in recent years. 3/ The new law on banking, presently 'being prepared, reportedly foresee- such a more equal representation. would generate an income unearned through work to the depositors, the contrary is true for the negative real rates of interest which imply a transfer of unearned income from the depositors to the borrowers. 3. Allocation of Resources 295. Given the determination to maintain the growth momentum and the incidence of negative real interest rates, requests for credits far exceed available resources. Further, the socio-political premises as set out by the Yugoslav constitution exclude a "capital market" in which the interest rate mechanism determines both the total volume of savings (and total investment), and the allocation of the available resources to alternatives with the highest profit potential. In the socialist self-management system of Yugoslavia these functions of regulating "extended reproduction" are rather subject to conscious choice of the direct producers of the investible surplus, with some participation of society as a whole. There- fore, allocative decisions among competing alternatives are essentially broadly negotiated decisions. In the absence of self-regulating market mechanisms, the quality of project analysis is of crucial importance for attaining a rational overall pattern of investment allocation. 296. Yugoslav banks and enterprises have developed for this purpose an elaborate system of indicators. However, most of them, and the most rigorous ones, are focussing on the micro-economic financial aspects, based on actual revenues and expenses as they affect the accounts of the enter- prise. As mentioned before, 1/ two elements enter into the micro-analysis which may create a distortion: the high n-tiial nQt aQigned tn lahor and the low actual cost assigned to credits (particularly credits extended from Federal Fund resources), which in combinaton could encourage the choice of a less than optimal resource mix. 297. The application of some form of economic (or social) benefit/cost analysis (in contrast and in addition to financial carried out) to all major investment decisions could help to provide a more rationall framework for thLMed In this -e-ConJOmWiC anCallysiS a-0-1. 4L. in puts and outputs would be valued by their scarcity (for society as a whole) rather than by the actual prices. 2/ In addition, the economic analysis would extend 1/ See paragraph 287. 2/ For example, actual interest rates would be replaced by scarcity in- terest rates which express the "opportunity cost" of using the finan- cial resources, i.e. the benefit of their economically and socially most desirable foregone alternative use. Similarly, actual payments to workers would be revalued by using a "shadow wage rate" which would take account of the under- and unemployment of the workers who would, at the margin, be transferred from the present low productivity to the new high productivity working Dlace. -146 - beyond the direct costs and benefits and include the indirect ones which affect organ"Izat-ions or individuals other tanCLU LLos d ly participati in the project. Such an economic project evaluation would not violate the principles of self-management by shifting decision-making to technocrats. It would, however, show more clearly which among several attractive alterna- tives is superior on economic and/or social grounds, or--if priority has already been assigned among these alternatives--what the economic and/or social costs of the project would be, i.e. the foregone economic benefits of the next best alternative due to the preemption of the financial resources. 298. The application of a rigorous economic benefit/cost analysis would also permit a more thorough understanding of the need for and the actual dis- tribution of the high subsidies which are granted to the recipients of the preferential interest rate credits. Such subsidies are justified if they serve as a means to sustain temporarily new enterprises or activities which have to pass through a costly learning period (i.e. a period of low product- ivity) before reaching financial viability. In this connection the fact need also be mentioned that these subsidies are ultimately passed through to the workers who receive a higher income than could be sustained on the basis of productivity alone.