Yugoslavia - Self management socialism and the challenges of development (Vol. 3 of 6) : Development issues

Report No. 1615a-YU FILE COPY Yu gncslavina * If-hAnnnoomint 0nrinhlirm .nrd thk *% IC L *. _l .% *, I: It. IL (In Six Volumes) volume 111 Pd,& Ill. eeom n 'ssues a2rch 2 1 197R Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Before January 23, 1971 1 US dollar = 12.5 dinars 1 Dinar = 8 US cents FroMU TJanuar 23, 1971 to December 2, 19 71 L VD dollar = a.0 'nars 1 Dinar 6.67 US cents From December 22, 1971 to July 12, 1973 1 US dollar = 17.0 dinars 1 Dinar = 5.89 US cents Since July 12, 1973 The Dinar has been floating. The rate of December 31,1977 was 1 US dollar = 18.445 dinars 1 Dinar = 5.42 US cents  g'Zrn- rtvrir'r A lr V lt~'t %I'.1V '...'r '.,ziir^.. USc ON1LY - 83 - YITGOSLAVIA! SELF-MANAGEMENT SOC TALTSM AND THE CHALLENGES OF DEVELOPMENT PART iTI--DEPVELMNT TISSTU I. STABILIZATION introduction 1.1 In the wake of the institutional decentralization and the greater market orientation brought about by the 1965 economic reforms, the economy experienced some imbalances in the supply and demand for commodities as well as for financial resources. Problems that appeared to be prone to short-term economic management, however, persisted; and the development path ot the econ- omy, though recording a high overall growth rate by international comparison, was characterized by fluctuating growth rates, 1/ repeated periods of enter- prise illiquidity and of balance of payments problems, and rising rates of inflation. By the mid-1970s when, upon the aggravation of international inflation, the rates of price increases and the balance of payments deficit reached record levels, stabilization became the primary: objective. In 1976, the inflation rate 2/ dropped to around 10 percent as compared to 18 percent in 1975 (and about 22 percent in 1974), and the balance of payments recorded a modest surplus as compared to deficits of about $1 billion in each of the preceding years. Although *this reversal came with the implementation of new system laws emanating from the 1974 Constitution, which has a potential con- tribution to stabilization, it involved high political dedication and adminis- trative interventions. It is, therefore, premature to argue that the factors making for inflation in Yugoslavia have been resolved. In addition to more coherent macro-economic policies, continued political commitment to stabiliza- tion as a prime objective appears to be, above all, necessary to prevent the recurrence of an inflationary spiral. This is especially important in view of a demonstrated trade-off between stabilization and the rate of economic growth which had in the past led to stop-go policies. 1.2 In prevailing Yugoslav terminology "stabilization" has a wider connotation which may also include sectoral and structural imbalances. In this chapter, while taking inflation as the central theme, we interpret stabilization within a somewhat broad context including,trends of major economic aggregates and no1iriPe.q 1/ Although the economic literature on Yugoslavia demonstrates the exist- e.ce of cyclical fluct-atios, it is n.ot the intenUon of this chapter to pursue this theme. See Branko Horvat, "Short-term Instability and Long-run- Trends in th1e V- n^-nnma,' V- o Tln ,1 a-nt'nF @ VE-ono-4 CZ 1 4Q7A '1 ITmplici 'IViL deflator. This document has a restricted distribution and may be used by recipients only in the performance I of their official duties. Its contents maY not otherwise be disclosed without World Bank au1thori7ation  - 84 - Trends and Functioning of the Economy, 1966-75 (i) Yugoslavia's Economic Performance: A Comparative Anaiysis 1.3 in an historical perspective, Yugoslavia has fared well by most economic and social indicators. As the figures below would demonstrate, 1/ the Yugoslav economy shows points of strength in comparison with OECD coun- tries. With an overall real G&P growth rate of 7 percent in the 1965-73 period, it was exceeded by Japan, Greece and Turkey only. It also ranked among the highest in terms of investment and savings rates. Concomitant with this high growth rate was, however, one major point of economic weakness, namely, an accelerating rate of inflation. Over the same time period 1965-73, the average rate of inflation in Yugoslavia was higher than in all OECD coun- tries. Table 1: GNP GROWTH AND INFLATION IN OECD COUNTRIES AND YUGOSLAVIA, 1965-73 GNP Investment Savines Inflation Country Growth Rate Rate - Rate/ Rate Switzerland 4.2 28.9 30.9 4.3 Federal Republic of Germany 4.7 26.4 28.5 4.6 France 5.8 27.3 27.8 5.2 Japan 1O.8 37.4 38.8 5.4 Austria 5.6 29.8 29.3 4.4 Italy 4.9 2.1 22.2 Greece 8.1 28.3 18.8 3.7 Spair. . 21.4 6. Turkey 7.1 20.1 19.3 9.6 A _ _ _ r _ on I I lugoslavia /.u /_'. o. 11.1 /1 Ratio of gross domestic investment to gross domestic product. /1 Ratio of gross nationai savings to gross nationai product. Source: World Bank, World Trables 1976. (ii) Trends of Economic Activity 1.4 In the early post-reform years, the economic system was still adjusting to various structural imbalances in the supply and demand for goods which inter alia were brought by: (i) the change in overall and rela- tive prices which occurred in 1965; (ii) the liberalization of foreign trade; and (iii) the relegation of income policy to working organizations. In addition to the rise of consumer demand resulting from the planned growth of I/ See also Table 1.1 (attached at the end of this chapter). (All table nos. prefixed with "1." can be found at the end of this chapter.)  - 85 - personal incomes, 1/ the large credit expansion 2/ also allowed for a rapid increase of investment in fixed assets and inventories, all factors in com- bination translating into higher prices by the end of the sixties. Over the entire 1966-70 period, imports also continued to expand faster than exports and the balance of trade deteriorated. Table 2: INDICES OF COMPONENTS OF AGGREGATE DEMAND, IMPORTS AND MONEY SUPPLY, 1966-75 (Current prices) 1970 1975 1975 '66 '71 '66 GMP 159 244 502 (Real GMP) /1 125 124 168 Investment /2 187 266 659 Consumption 173 245 542 Exports 138 225 334 Imports 183 236 488 Money Supply 160 323 591 /1V At constant 1966 prices. /2 Including inventories. Sources: Tables 1.3 and 1.7 at the end of this chapter. (All table numbers prefixed with "1." can be found at the end of this chapter.) Statistical Yearbook of Yugoslavia, Tables 106-4 and 106-5, 1976 and various issues. 1.5 By the end of 1971, stabilization was established as a major objec- tive and a number of measures were taken to moderate the expansion of domestic components of demand, to affect the income distribution in favor of a higher savings rate and to improve the balance of payments position. These measures included: (i) devaluing the dinar twice in the course of the year; 3/ (ii) requiring potential investors in non-economic activities to hold deposits with business banks as a condition for obtaining credit; (iii) passing a law on the recording of liabilities and means of settlement of debts of users of social 1/ See paragraph 1.11. 2/ Which followed an unduly restrictive monetary policy in 1967. 3/ By 20 percent at the beginning of the year and by a further 18.7 percent at the end of the year.  - 86 - resources; (iv) passing a law on the revaluation of fixed assets; 1/ (v) tightening of credit and monetary policy; and (vi) freezing of prices in the last quarter of 1971 and until February 1972. 1.6 As the figures in Table 2, Table 3 and Graph 1 below demonstrate, these stabilzatiorn measures moderated the real mpnqi,Jan nf t-he ernnnmy with the growth of GMP averaging about 5 percent in 1972-73 as compared to about 9 --f-t i4 1071 butf the,y did not check the rise of prie or -he nm4-1 increase in consumption or investment demand all of which continued to accellerate. I1.7 lhe devaluation vwas on'ly temporarily effective insiultn 1.. 1 I~~~LI~ U= VdL. L.L.JL ~ JI~y LLAjL L L.L.LJ ~ L..L.LV in 0 LJ.uI UU