Yugoslavia - Economic development (Vol. 3 of 6) : Volume 3

DOCUMENT OF INTER.NATIONAL BANK FOR RtECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 194a-YU THE ECONOMIC DEVELOPMENUT OF YUGOSLAVIA (in six volumes) VJOLUME III V., Industry and Mining Appendix to Vi VI. Agriculture VII. Infrastructure VIII. Regional Deve.lopment Problems November 26, 1973 Europe, Middle East and North Africa Region DThis report was prepared for official use only by the Bank Group. It mnay not be published, quoted or cited without Bank Group authorization. The Banlk Group does not accept responsibility for the accuracy or completeness of the report.  CUERRENCY EQUIVALENTS Before January 23, 1971 1 US dollar = 12.5 dinars 1 Dinar = 8 US cents From January 23, 1971 to December 22, 1971* 1 US dollar = 15.0 dinars 1 Dinar = 6.67 US cents From December 22, 1971 to February 23, 1972 1 US dollar = 17.0 dinars 1= Dinar = 5.89 US cents From February 23, 1973 to July 12, 1973 iYaintained a central rate of 1 US dollar 17.0 dinars 1 Dinar = 5.89 US cents Since July 12, 1973 The Dinar has been floating. The rate of July 12, was 1 US dollar = 1550 dinars 1 Dinar o.45 US cents * All conversions of 1971 data into dollars in this Report have been made at this exchange rate.  - 121 - V. INDUSTRY AND MINING Introduction 5.1 Rapid industrialization has been the major ingredient in the high rate of economic growth and structural change in Yugoslavia. The index of industrial production increased at an average annual rate of 10.6 percent during 1952-71, and the share of industry in GDP in 1966 prices increased from 17.5 percent to 33 percent over the same period 1/. Industry and mining account for 47 percent of total social sector employment in "productive" ac- tivities and provide over 85 percent of total exports. Unlike the situation in many other developing countries, industrial growth has been outward- oriented and, on the whole, competitive. 5.2 Nevertheless, over the years there has been a slowing down of in- dustrial growth, its contribution to economic growth and, in particular, its employment-creating effects: Table 5.1: EVOLUTION OF INDUSTRIAL OUTPUT AND EMPLOYMENT, 1952-71 1952-60 1960-65 1965-71 Growth of industrial output percent per_year (1966 prices) 13.0 10.5 6.6 As index of growth of GDP (1966 prices) 143 123 107 Average annual increase in industrial employment, thousand 68 54 26 Share of total increase in social sector employment, percent 41 44 54 The slower growth during the last six years is related, in part, to Yugoslavia's balance of payments difficulties. But there is also a structural factor in- volved: the rapidly increasing capital-intensity of Yugoslav industry. In spite of this, as the above table shows, the industrial sector accounted for an increasing proportion of the total new jobs created in the social sector. 1/ Because the prices of agricultural commodities and services have increased more rapidly than industrial prices to correct earlier price distortions, the share of industry ln GDP, in current prices, declined from 39 percent in 1965 to 30 percent in 1971.  5D.3 industry, as the leading sector in Yugoslav development, absorbed about 52 percent af total "economic sector" investments during 1952-69, its share remaiiing quite stable throughout the period - 53 percent in 1952-60, 52 percerLt during 1961-65 and 49 percent during 1966-69 1/. Consequently, fixed assets in industry account for about 55 percent of total productive fixed assets in the social sector, Reference to Table 5.1 suggests that during the 1960s: (a) fixed assets in industry and industrial output in- creased pari nassu at very similar rates of growth; (b) the growth trend (in spite of the trough in 1965-67) is fairly well identified as a constant annual investment quota with a constant (or slightly rising) annual increment in net industrial output, both measured in 1966 prices; (c) that, if one comG ares '.%e second half of the 1960s with the first half, there has been a continuing sharp increase in the ratio of new capital itnvestment to new jobs created. This "intensive" development strategy is reflected mainly in a tendency for production in all branches of industry to become more capital- inten.sf e but there has also been an increased share of capital-intensive industries irn industrial employment 2/. Since the lonlg-run gairn in net out- put tedad tcse co;sat, one could say that there was simply a trade-off between labor-intensive investments in the early period and capital-intens.ive investnents in the later period. Even assuming there was no loss in output, this trade-off does not seem favorable considering substantial emigratio-a anid underemployment. There is a further presumption that, in real terms, the output growth in capital-intensive industries was over-estimated, Yugoslav prices in those lines being generally higher in relation to world market prices than in more labor-intensive industries. That such growth was, in fact, co,stly is corroborated by the observations on the steel, chemicals, and pulp anid paper industries f-arther below. Major misinvestments, like Skopje steel or KosovJo nitrogen were dir ectly related partly to the process of decentralization. Yet such problem projects must be weighed against major achievements like the devzal- opment of the automotive and eleetrical equipment industries. The key question which cannot be answered without much more intensive research than is possible in this context is whether the price paid for industrial diversification, alid regional development was reasoo,able, i.e. whether the excessive costs will be compensated by added investmTent opportunities and more dynamiic industrial growth in tne future. 1/ Econom.i c sector investments averaged about 67 percent of total investments in 1961-65, but 74.5 percent of total investments in 1967-69. Hence, in spite of a falling share of industry in economic sector investments in the latter half of the G960's, its share in total investments remained fairly constanC writhin a range of 28-30 percent. 2/t Changes -ir the distributl.oa. of industrial investment by various branches of industry is s4out in Table 2.7, Chapter II.  - 123 - Table 5.2: GROWTH IN FIXED ASSETS, NET OUTPUT AND E12LMMEITT IN NMIUFACTURING AND INDTING, 1960-71 (Values in billion dinars at 1966 prices Enployment in millions) Fixed Assets, Purch. Value End of Year Fixed Net,Output Employment Year Total Incr. Investments Total Incr. Total Incr. 1960 45.3 4.45 17.90 1.04 1961 50.3 5.0 5.25 19.12 1.22 1.10 0.06 1962 56.6 6.3 5.91 20.51 1.39 1.13 0,03 1963 60.3 3.7 6.66 23.72 3.21 1.17 0404 1964 65.7 5.h 7.19 27.57 3.85 1.20 0.12 1965 71.4 5.7 5.79 29.50 1.93 1.3 0.0