Yugoslavia - Economic development (Vol. 2 of 6) : Volume 2

FILE CCTY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 194a-YU THE ECONOMIC DEVELOPMENT OF YUGOSLAVIA (in six vo:lumes) VOLUME II I. The Historical and Tnstitutional Setting II. Economic Trends and Development Issues: 1953-1972 III. PQpulation Migration and Employment IV. Inkome Distribution and Social Welfare November 26, 1973 Europe, Middle East and North Africa Region Thii report was prepared for official use only by th. Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuiracy or completeness of the report.  CURRENCY 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 Maintained a cent;ral 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 = 15.50 dinars 1 Dinar = 6.45 US cents * All conversions of 19?71 data into dollars in this Report have been made at this exchange rate.  THE ECONOMIC DEVELOPMENT OF YUGOSLAVIA I. THE HISTORICAL AND INSTITUTIONAL SETTING 1.1 This chapter gives a summary historical account of the evolution of the present social and economic system of Yugoslavia. Its object is a strictly limited one, namely to serve as an introduction and a frame of ref- erence for the more detailed analysis, in subsequent chapters, of the eco- nomic situation and problems of present day Yugoslavia. Hence the treatment is not only brief but very selective. Attention is concentrated on those as- pects of the past which bear most obviously on contemporary social, polit- ical and economic issues. The main emphasis is on broad institutional and political aspects, which for the most part are taken as given in the main body of the report. 1.2 Certain aspects of the development of the Yugoslav system can be best understood in relation to what is from the economist's point of view the rather remote past. Hence, while this chapter deals principally with more recent events, reference is also made to developments over a period of some fifty years, from the initial establishment in 1920 of what was then called the Kingdom of the Serbs, Croats and Slovenes. The first part of the chapter covers the period to 1952, by which time the distinctive Yugoslav experiment in social and economic organization had been fully launched and some of its characteristic features were already becoming clear. The second part surveys the evolution of the system from 1952 to the present day. 1.3 The postwar development of Yugoslavia may be viewed as consisting of several periods. In the immediate postwar period Yugoslavia was an or- thodox socialist state with a large degree of centralizated direction and control, comprehensive and detailed economic planning and little reliance on market forces. In 1948 Yugoslavia was expelled from the Cominform following a dispute with the USSR and during the next two years trade with the East Bloc dried up completely. In 1950 Yugoslavia began to evolve a new type of Socialist economy based on decentralization of decision making and self- management and relying increasingly on the market system. The attainment of increased economic efficiency within a socialist framework has been one of the major objectives of the process of institutional change. The decentral- ization process, however, also reflects a recognition of the strong national- ism of the constituent parts of Yugoslavia. At the level of the enterprise, self-management has meant gradually increasing autonomy with decision making powers on management, investment and income distribution increasingly given to the workers. At the level of the government it has meant the erosion of the power of the Federal Government and greater autonomy and authority to republics and local governments. A third facet of the progress of decen-- tralization was the replacement of the budget and extrabudgetary funds at all levels of government as the major source of resources for financing in- vestment by the banking system. Associated with this was the decline of central control on the allocation of investment. The process has proceedied at a varying pace with periods of rapid change being followed by years of- consolidation. The Economic Reform of 1965 however, constitutes something of a Great Divide, when the system acquired, all its present essential fea- tures.  -2- A. Principal Developments to 1952 (i) Economic Changes Up to 1941 1.4 Throughout the interwar period, and despite an active policy of promoting industrial growth, the Yugoslav economy remained primarily agricul- tural: the proportion of the population depending on agriculture appears to have fallen from almost four-fifths to rather less than three-quarters. The main single change affecting agriculture during the period over the greater part of the country was the extensive land reform which was introduced in 1919. This provided for the abolition of serfdom and the break-up of large landed estates. Although this reform became effective only gradually and over a period of time, it extended to the country as a whole the principle which had already been established in the older part of the prewar Serbia (though not in Macedonia), that the land should belong to those who tilled it. The reform led to a fall in the size of the characteristic agricultural holding. This tendency was further reinforced by the fact that the growth in the agricultural population somewhat exceeded the increase in the available amount of cultivable land, which over the whole period was of the order of one-fifth. Hence by the close of the interwar years the average size of a farm was probably less than five hectares, while the total number of agri- cultural proprietors was not far short of 2 million out of a total agricul- tural population of perhaps 12 million. 1.5 At the same time, industrial and mining enterprises were encouraged through a set of policies which included state enterprise, tariff protection and favorable incentives for foreign investors. State enterprises were es- tablished, or took over from private ones, in iron and steel, oil refining, armaments, coal mines and some other sectors. It has been estimated that total manufacturing employment doubled during the inter-war period to a level of about 300,000 while employment in mining increased from about 30,000 to 50,000. Coal production rather more than doubled, and a similar increase in output probably occurred over the industrial sector as a whole. 1.6 The combination of industrial and commercial growth on the one hand, and on the other the increase in agricultural output resulting from a large cultivated area and from somewhat higher average yields for certain crops, led to a substantial rise in total national output over the whole pe- riod. One estimate has put the average annual growth of output at 5.0 per- cent for the period 1923-29, and 1.7 percent for the period 1929-39, in the early part of which production levels were badly affected by the depression. Combining these two figures yields an annual average for the sixteen-year period of about 2.9 percent. By comparison, the average annual rate of pop- ulation increase in the inter war years was of the order of 1.4 percent, so that some increase in income per head would seem to have been attained. 1.7 Despite this progress, Yugoslavia was still a poor country by the standards of Western Europe and North America. Thus for the years 1934-38 it has been estimated that annual consumption of meat per head was approxi- mately 23 kilograms, as compared with 64 kilograms in the United Kingdom; the infant mortality rate was 140 per thousand, as compared with 55 in the  - 3 - U.K.; and the number of radio sets and of passenger cars and buses were respectively 9 and 0.9 per 1,000 persons, for which the corresponding Br:itish figures were 181 and 43. An estimated 45 percent of the population over ten years old was illiterate, as compared with over 50 percent at the time of the census in 1921. 1.8 Despite the breaking-up of landed estates in the regions where these still existed, considerable inequalities continued to exist, and even to in- crease, with respect to the distribution of income and consumption. In par- ticular, the policy of favoring industry meant that a disproportionate share of the increase in income went to the industrial sector and to the towns, and more especially to the already established industrial centers in Slovenia and Croatia. Partly for this reason, there was probably little if any reduction in the absolute numbers of these living in extreme poverty in the more back- ward rural areas of the country. This was a major factor for the emergence and continuance of the revolutionary movement in Yugoslavia. (ii) The National Question in Yugoslavia Between the Wars 1.9 Major internal political problems of Yugoslavia in the interwar period arose from the extreme diversity of its newly joined constituent ele- ments. This diversity was remarkable with respect even to geographical and administrative factors alone. The territories which came together to form Yugoslavia comprised seven distinct political, legal and administrative units. Two of these, namely Serbia and Montenegro, were independent countries at the time of the outbreak of the First World War. Both of them, and Serbia espe- cially, had then recently acquired further accessions of territory whichi had not yet been fully incorporated. The remaining five units had all formed part of the Austrian-Hungarian empire. Two of these (namely Slovenia and Da:Lmatia) were in the Austrian half; two others (namely Croatia-Slavonia and Vojvodina) were in the Hungarian half; while the province of Bosnia and Herzegovina was jointly administered by the common Austro-Hungarian central bureaucracy. Hence the new state inherited a wide variety of previously separate iurisdic- tions. 1.10 Superimposed on these divisions, and only partly explained by them, was an extraordinary diversity and lack of cohesion with respect to ethnic, linguistic, religious, cultural and historical factors, together with wide disparities in social and economic development. Some particular aspects of these are worth noting, not only because of their effects on the early evolu- tion of the Yugoslav state, but also because of the influence that they con- tinue to exercise, though in ways that have been considerably modified by time, even in the present day. 1.11 One aspect of ethnic diversity was the existence of substantial national minorities. Although the reason for the establishment and survival of the Yugoslav State was that it united the South Slav peoples, about one- sixth of the population during the interwar period consisted of non-Slavonic groups. Of these the most important were Albanians, Germans, Hungarians and Turks.  -4- 1.12 Within the Slavonic majority, five distinct peoples existed: Serbs, Croats, Slovenes, Montenegrins, and MIacedonians. Among these, language was and remains a primary distinctive and unifying factor. At the same time, linguistic differences exist which if disregarded or exploited can easily become sources of friction. Both Slovene and Macedonian are distinct from Serbo-Croat, though during the inter-war period Macedonia was not officially recognized as such. Although the Serbo-Croat language is common to Serbs, Croats and Montenegrins, the Serb and Croat variants are not completely identical, while in Croatia (as in Slovenia) the Roman alphabet was used and in Serbia and 11Montenegro (as in Macedonia) the Cyrillic. 1.13 In addition to the divisions just noted, between the South Slavs and the various minorities and between different linguistic subdivisions of the Slav majority, there were also major causes of division which affected both the South Slav people and the minority groups alike. 1.14 One of the most important of these was religion. The population of Croatia (including Dalmatia) was and is very largely Catholic, while in the southern and eastern parts of the country the Serbs, Montenegrins and Macedonians were for the most part members of th-e Eastern Orthodox Church. In addition, about 10 percent of the population were Mloslems. These in- cluded not only the Albanian and Turkish minorities, but also a group in Bosnia-Herzegovina belonging to the Serbo-Croat coimmunity. 1.15 Both alphabetic and religious dividling-lines coincided with a very broad historical and cultural divergence between the northern and western regions, on the one hand, and the southern and eastern regions on the otlher. Serbia, Tlontenegro, Bosnia-ilerzegovina andI lacedonia hiad all been subject over a very long period first to Byzantine and tlhen to Turkish rule or in- fluence. On the other hand Turkish expansion had affected Vojvodina and part of Croatia only temporarily, and Slovenia and Dalmatia not at all. In these areas the main cultural influence remained western and Catholic, while as noted above the political allegiances over a substantial period ihad been to Vienna and Budapest. 1.1.' A partictilarly serious aspect of this historical led,acy was the fact that the two largest national coiamunities in Yugosiavia, niamely the Serbs and Croats, had over a period of severil centuries been politically separated and subject to quite different sets of influences. 1.17 Social and economic development had also been greatly divergent. Of the historic provinces, prosperity was greatest in Slovenia and in a small number of urban areas in Croatia (including Dalmatia), where such inidustrial and commercial development as had taken place was largely concentrated, and in the rich agricultural area of the Vojvodina. While little industrial de- velopment had taken place in Serbia, a situation had long been established there in which the land was fairly evenly divided among peasants who owned their holdings. This was in contrast to the situation in Croatia and Vojvodina, in which large estates coexisted with substantial numbers of small peasants and landless workers. Similar inequalities were prevalent  - 5- in Iacedonia and Bosnia-Herzegovina, where because of less favorable natural conditions levels of living were generally lower. According to the census of 1921, the illiteracy rate among persons over 10 years old exceeded 80 percent in both Macedonia and Bosnia-Herzegovina, whereas the figure for Slovenia was less than 10 percent. 1.18 The differences just summarized were bound to give rise to extraor- dinarily difficult problems. Unfortunately, these were intensified during the inter-war period as a result of the internal policies pursued by succes- sive governments in Yugoslavia. Hence the nationalities problems, and in particular the antagonism between the Serb and Croat communities, bec.ame more acute as time went on. 1.19 The main single reason for this was that little attempt was made to acknowledge and respect national differences, and to accommodate them within a decentralized political and administrative structure taking account of historical divisions. Political life was consistently dominated by a rul- ing group which was composed almost entirely of Serbs, though with periodic support from individual members of other communities and from the main Slovene political party. The royal family, the leading ministers and senior military officers, and the principal recipients of patronage and key appointments. were Serbs. Successive institutional arrangements were alike in maintaining polit- ical power in the hands of this group. At the same time, local administra- tion (particularly after 1929) was subject to strong central control, while its constituent units were created without regard for national and tradi- tional dividing lines. 1.20 The operation of this system gave rise to considerable opposition, which was generally though not always met with repressive measures. The Croats in particular became an increasingly disaffected community in which separatist elements gained ground. 1.21 The failure to recognize and to deal effectively with the problem of nationalities, and to ensure a more even national distribution of polit- ical power and influence, greatly weakened the internal cohesion of Yugoslavia during this period. A new approach to this basic problem was clearly rneces- sary if the conception of a South Slav state was to recover and mainta.n the support of the peoples concerned. (iii) The Situation in 1945 1.22 From an economic point of view, the main effect of the war on Yugoslavia consisted in the appalling human casualties and physical damlage which it caused. Fatal casualties arising from the war hlave been estimated at 1.7 million, which was over 10 percent of the population. Even more sig- nificant, the average age of those killed was 22 years. W4idespread and serious damage was done to the transport system, while about 40 percent of manufactur- ing capacity was either destroyed or seriously danaged. Some 3.5 million people were left homeless. Hence a very considerable effort of reconstruc- tion was needed before pre-war levels of output, still less consumption could be restored.  -6- 1.23 From the political point of view, the effect of wartime developments was to transform the whole situation. Each of the two main political causes which had existed before 1945 - namely the maintenance of a regime dominated by old Serbia and its ruling group before the war, and the establishment of a fully independent Croatian state during the war - had been not merely defeated but totally discredited during the war years. The political vacuum thus created was occupied by the Communist Party of Yugoslavia, which at the out- break of the war had been an illegal group numerically insignificant but with growing influence. The Party emerged from the wartime struggle against internal and external enemies in full control of the whole country, following the now celebrated war of national liberation. 1.24 In consolidating the position which it had thus won, the Communist Party had a number of positive advantages, in addition to the negative ad- vantage that all serious rivals for power had disappeared from the scene. In particular, it derived strength from: (a) the prestige it had acquired from its outstandingly courageous and successful direction of the partisan resistance during the war; (b) the active support of the Soviet Union, together with the tolerance (following what finally had become close military collaboration in the war years) of the United States and Great Britain; and (c) the fact that it represented and drew support from all sec- tions of the nation, and plainly had no bias or special com- mitment toward any particular linguistic, regional or religious group. Of these the first became gradually less important as wartime memories grew fainter and as to the second the Soviet Union became within a few years ac- tively hostile to the Yugoslav Communists. The third factor, however, has been not only more enduring but of fundamental importance. The rise to power of a genuinely Yugoslav Party, which had already recognized and indeed in- sisted on the need to respect the separate identities of the peoples and regions which comprised the Yugoslav state, made possible a new and more con- structive approach to the nationalities problem. This may well have been a necessary condition for the continued survival of Yugoslavia as an inde- pendent sovereign state. (iv) The Period of Central Planning, 1946-52 1.25 Under the constitution which was formally adopted in 1946, Yugoslavia became a federal state made up of six constituent republics. These were es- tablished on the basis of the old historic provinces, and comprised Serbia, Croatia, Slovenia, Bosnia-Herzegovina, Montenegro and Macedonia. From one point of view, the choice of federal system was symbolic rather than real, since at this stage the power of the republican governments were exceedingly limited. Nonetheless this decision was important. It marked the passing of the pre-war conception of a centralized Yugoslav governmental system which  -7- deliberately disregarded the historic divisions and loyalties; and it also gave formal expression to the fact that Serbian predominance was no longer an objective of the central government. The recognition of Montenegro and Macedonia as separate republics was clear evidence of the latter, as indeed was the national composition of the leading members of the Communist Party. Two later constitutional developments further emphasized this point. First, Macedonian was formally recognized and established as an official language distinct from Serbo-Croat. Second, two autonomous provinces, of Vojvodina and Kosovo, were created as separate administrative units within the republic of Serbia. 1.26 Despite this liberal-minded approach to the problem of the nation- alities, the Yugoslav regime of the early postwar years was highly centralized and authoritarian. A number of related factors accounted for this. One was the wish to consolidate the new regime in the face of actual or potential op- ponents, who were perceived as directly or indirectly encouraged by the great powers. In the early postwar years the main source of opposition was perceived as being the traditional pre-war parties and ruling circles while it was the western powers with whom external relations were difficult and contentious. After June 1948 there was the threat arising from the antagonism of the Soviet Union, and the risk that the Soviet position would gain widespread support within the Yugoslav Communist Party itself. 1.27 Another influence which made for centralization was the wish to imitate the Soviet example, which was at this time thought of as uniquely appropriate, by adopting an ambitious centrally-directed five year economic plan. Since moreover the Yugoslav plan imposed considerable sacrifices on the community of present consumption for future gains, its implementation could hardly be taken for granted without a strong coercive element. An important aspect of this was that the method of financing the plan, as also the agricultural program as a whole, brought the regime increasingly into conflict withi much the largest social group in the country, namely the peasants. 1.28 An argument against decentralization to the republican level of government was that from the outset the new economic plan included as a lead- ing objective the equalizing of living conditions throughout Yugoslavia, through accelerated economic development in the poorer republics. This could only be achieved, at any rate at the rapid pace which was initially chosen, through the central government, and in which close control was ex- ercised over the location of new investment projects. Also the risk could not be ignored that if it was possible for separate political power bases to be established at the republican level, this might lead to the reappear- ance of political movements which derived their support from particular com- imunal groups, thus recreating the factional struggles of the war and pre-war years. 1.29 The 1946 constitution provided for state direction of economic life and development, through the agency of a comprehensive economic plan. The first postwar plan covered the five years from 1947 through 1951, and was drawn up in 1946 and finally approved in April 1947. It provided for a  -8- huge expansion of industrial output, to about five times the pre-war fig- ure, while agricultural output was to be raised to about 20 percent over the pre-war level. A very high rate of accumulation was provided for, which was to be directed particularly towards industry (with special emphasis on producer goods) and to the poorer regions. Production targets were established in an extraordinary degree of detail, for branches, products and enterprises within each of the six republics; and investment, prices, and flows of materials and finished products were likewise subject to rigorous supervision and control. This elaborate system was operated by a set of Federal ministries each deal- ing with particular branches of industry. 1.30 The industrial system for which these plans were drawn up was al- ready vei_ largely owned by the state. By 1946 the great bulk of industrial and mining enterprises, the whole of the banking and transport systems, and almost all of the wholesale trade had been nationalized. This was followed in 1948 by the extension of state ownership to retail trade and catering. These measures established the system which had been maintained in Yugoslavia to the present day, under whichi private ownership of enterprises is restricted to small-scale production and trade, where an enterprise employs no more than five people outside the immediate family of the owner. (Housing units with more than three apartments were also brought under public ownership at a later stage, in 1958). 1.31 At the same time, a land reform was introduced by which an upper limit of 35 hectares of cultivable land was placed on all private holdings (including church properties). The lands becoming available in excess of this figure, together with the lands previously owned by the German minority which had been expelled, were confiscated and turned over either to state farms or cooperatives or to individual peasants. An attempt was made, though in the early stages of the Plan it was not pursued very strenuously, to extend the area owned by the state farms or producer cooperatives and to reduce cor- respondingly the element of private landed property. In order to guarantee a basic minimum flow of food supplies at regulated prices, a system of compul- sory deliveries was imposed on peasant farmers. 1.32 In the first two years of the Plan there was an impressive increase in output, while the investment ratio was raised significantly although signs of overstrain started to appear in 1947. However, the possibility of fulfill- ing the Plan was destroyed by the break after mid-1948 with the Soviet Union and the other Cominform countries. This had two major distinct effects on the Yugoslav economy. First, there was a rapid reduction, literally to zero, in its exports to and imports from what had previously been - and had been expected to remain - its principal trading partners. Imports from the so- cialist countries, which had been 56 percent of the total in 1947, had ceased altogether by 1950. Second, the new external threat caused the Yugoslav gov- ermnent to undertake a very considerable increase in its expenditure on de- fense, which by 1951.had risen as high as 20 percent of national product. For a period of three years, from 1949 through 1951, the combined percenitage of G?P absorbed by investment and defence expenditure exceeded 40 percent. To make matters worse, both 1950 and 1952 were years of drought and excep- tionally poor harvests. As between the calendar years 1948 and 1952 there  - 9 - was virtually no increase in total national output. If in order to abstract from the effects of harvest fluctuations comparison is made on the basis of three-year averages, the average annual rate of growth in national product between 1947-49 and 1951-53 was about 4 percent. This was low in relation both to later achievements and to the rate of growth in the immediate post- war years, although higher than the inter-war average. 1.33 One result of the boycott imposed by the socialist countries was that the Plan objectives had to be abandoned. Even the principle of long- term planning was no longer emphasized, and the actual practice became to formulate annual plans only. However, the system of targets and allocations and the elaborate central machinery remained. In agriculture the system of compulsory deliveries was maintained, while in mid-1948 an intensive campaign was launched to induce the peasants to join in forming production cooperatives. The land farmed by cooperatives or state farms increased rapidly over the next three years, reaching some 27 percent in 1951 for the country as a whole and over 50 percent for Vojvodina. 1.34 One of the effects of this renewed emphasis on collective farming enterprises was to demonstrate again, in the face of accusations of heresy from the east, that Yugoslavia was and intended to remain a socialist state. But there was also a different and more lasting reaction to the controversy with the Soviet Union and the difficulties which arose from it. Not only was the Soviet example no longer necessarily to be followed, but its defects and limitations became a matter for extensive analysis. At the same time, the weaknesses of detailed imperative central planning, particularly in face of the enormous problems of adjustment created by the rupture with the Cominform countries, were becoming increasingly evident. Hence an extremely lively debate arose within Yugoslavia, in which the nature and problems of the transition to a fully socialist society, which had previously been regarded as fairly well established, were examined afresh. The outcome of the debate, and of the lessons which recent disillusioning experiences had seemed to teach, was a move towards a quite different conception, the modus operandi, of a so- cialist economy. As early as mid-1950 the first major sign of this appeared in the form of a law which provided for the creation of workers' councils in state enterprises. This marked the beginning of a unique series of social and economic experiments which more than twenty years later is still very much in progress. B. The Evolution of the Decentralized Self-llanaged System, 1950-71 (i) Basic Ideas and Characteristics 1.35 The Yugoslavs began to evolve a new economic system in 1950. The system represents more than just a ireaction to the experiences with the centrally-administered economy of the early postwar years triggered by the disagreements with the Soviet Union. It marks a search for a new kind of socialist society. The system may be termed a "socialist market economy" or a "socialist democracy" depending on whether the political or economic content of the evolution is stressed..  - 10 - 1.36 There are a number of interconnected elements that underlie the system. First, a basic tenet of the Yugoslav system is that a state is not socialist "until it begins to wither away" 1/. Nationalization of resources and their management by the state is regarded only as "the first, and the lowest, form of socialism" (Kardelj) which, if there is a strong bureaucracy exploiting power for its own ends, degenerates into "state capitalism". Sec- ondly, and following from the first, instead of state ownership and control there is social ownership and control of the means of production. The con- cept is a philosophical one. Social ownership as an economic category is not vested in any holder. No one holds the right of social ownership, not even the federation... But, the law recognizes a special property right which it calls the "right to use". 2/ Under social ownership the worker is vested with the management of the means of production and the right to dis- pose of the product. Workers self-management is seen as the fundamental principle of social organization without which socialism is not possible because without workers' self-management they would not have the disposition of the "surplus value" created in production. Thirdly, the decentralization of political and economic decisions, from the Federal government to republics, communes and enterprises is necessary because workers' management cannot be meaningful without it. Fourthly, as a corollary of decentralized decision making there has to be a greater reliance on markets as a guide to the al- location of resources. This means the reduction of centralized planning and control. There has to be a decentralization of the planning function to the enterprises, the communes and the republics. The plan for the economy as a whole is "only aimed at channelling and coordinating the trends of general development" 3/. 1.37 The evolution of the system designed to incorporate these basic principles has been characterized, first, by a pragmatic experimental, and relatively nondogmatic approach. For example, despite the basic idea of social ownership property, peasant ownership of land is accepted subject to prescribed limits as to size of holding. The experimentation stems at least partly in the unique nature of the system. The Yugoslavs have no model to follow and the workability of ideas and institutions has to be judged by 1/ E. Kardelj, Address to rederal Assembly, April 2, 1952. President Tito in a speech to the Federal Assembly, July 26, 1950, also expressed the same idea when he said that "Marx, Engels and Lenin" teach us that the state begins to wither away from the moment when the proletariat comes to nower." 2/ "Development of Forms of Ownershiplin Yugoslavia", Yugoslav Survey, January - March, 1963, page 1686. Also see B. Horvat, "Yugoslav Eco- nomic Policy in the Post War Period: Problems, Ideas, Institutional Developments', American Economic Review, June 1971, Supplement, Pages 106-108 and V. Racic "Fundamental Oharacteristics of the Yugoslav Eco- nomic System" in Yugoslav Economists on Problems of a Socialist Economy; R. Stojanovic (Editor), New York 1964. 3/ Jugoslovenski Ekonomski Sistem 1954, (Belgrade, 1954), page 2.  practice and changes made on the basis of experience. Secondly, at no stage during the development of the system has the process of reform and rethinking been brought to a halt. The laws spelling out the new system have been changed frequently. Often the existing system did not correspond to the legal frame- work because the realities of the working of the system sometimes led to a tacit abandonment of statutes inconsistent with its further development. Sometimes practice preceded the legal enactment, and sometimes laws that were enacted were never put fully into practice. Progress was not easily accom- plished, and problems and finding an appropriate balance between the objec- tive of decentralization and self-management on the one hand and the need for coordination of decisions, economic stability and management at the macro-economic level had to be faced from the start. Finally the whole process has occurred in an environment of relatively free and open discus- sion at all levels and has been marked by a deep involvement of all elements in Yugoslav society. 1.38 It would not be correct to view the Yugoslav system as a halfway house between a socialist system of the Soviet type and a capitalist system. It is basically a socialist system based on Marxist doctrines which reflects the Soviet model as not solving the problem of the "alienation" of the worker from capital and from the product of his work which are characteristic of capitalist society. The evolution of the system has been marked by dis- continuities - periods of rapid changes (e.g., 1953, 1961, 1965 and 1971) have been followed by periods of consolidation, marked by attempts to organize. This is in line with Yugoslav political theory. The Program of the League of Yugoslav Communists adopted at the 7th Congress (1958) considered "impetuosity to accept artificially created forms" to be "just as harmful as the conserva- tive retention of obsolete forms" (page 125). MIore concretely it warned against two "equally dangerous and harmful tendencies" - "first, against the tendency towards an anarchist underestimation of the role of the state... and secondly, against the tendency to transform the state into an all embracing force" (loc. cit. 125). During the whole period of evolution of the new system there have been periods when reaction against protagonists of one of the other idealogies was dominant. (ii) Period of Transition 1950-53 1.39 Although, as noted, the principle of self-management was introduced in 1950, its practice was redefined and extended during the next few years. In 1952 the control of all state enterprises was formally vested in the workers' councils, who were regarded as the trustees for the fixed capital which was provided to them by the Yugoslav state. At the same time all pro- duction decisions became the responsibility of the enterprises. Machinery and procedures were defined for constituting workers' councils and providing for the executive direction of enterprises. Initially the director of each enterprise was still appointed centrally, but late in 1952 the appointment was vested in the local authority (the commune), and in the following year this was replaced by a system of appointment after public advertisement by a committee representing the commune and workers' council concerned.  - 12 - 1.40 The move towards greater reliance on the market was not the result of a conversion to forms of economic reasoning then almost unknown in Yugo- slavia, but was adopted because it seemed a necessary consequence of the principle of self-management. The process of decentralizing decisions to enterprises began in 1950, but gathered momentum in the following year. The Federal ministries wich had devised and administered the Plan were abolished to be replaced by secretariats and much smaller staff and greatly restricted functions. In December 1951 a law on "Planned Management of the National Economy" established from 1952 a system of annual plans (a second five-year plan was not embarked on until 1956), and introduced the practice of what was known as planning of "basic proportions," in which the amount and broad allocation of investment was determined while the decision regarding quantity and quality of output and its price were left to enterprises. Before 1952 the investment allocations of the Plan were implemented through the budget. This arrangement was abolished with the Law on Planned Management. Initially, the National Bank of Yugoslavia was responsible for actually channelling funds into projects. However, in December 1953 a system of auctions for investment loans was instituted as the device for allocating investment funds to indivi- dual enterprises, along the basic proportions laid down by the Plan. Bids received from enterprises were evaluated and those offering the most compe- titive terms were accepted. 1.41 At the same time the wide variety of prices and markets was re- placed by a single price structure, while rationing was abolished and the scope of price control reduced. Centralized distribution of materials and finished products was abolished with the ministries which had operated it. According to a law of January 1951 prices of products that wqere not regulated were to be equated to average cost of production (determined by the price commission on the basis of reports of producing enterprises) plus a margin specified for cach industry by the government. For consumer goods and for enterprises producing for a local market, the price so determined was to be a minimum. Obviously the method for setting prices did not provide any in- centive to reduce average costs and protected existing enterprises against competition from new more efficient producers. However, it did signify the acceptance of profit as an economic incentive and criterion. The relative freedom of enterprises to fix prices led to price and market agreements among enterprises which were made illegal in 1955. Some relaxation of controls was also attempted in foreign trade, where restrictions were greatly reduced fol- lowing a devaluation in 1952 of the dinar to one-sixth of its former official rate. 1.42 In agriculture, there was an almost complete reversal of the objec- tives and policies which had been adopted in the early postwar years. The idea that the socialization of the peasant is necessary for the socialization of the country was instead replaced by the policy that socialization of the country would eventually lead to the socialization of the peasant. Conse- quently emerged the division of the Yugoslav economy into a socialist sector and private sector with the former being identified with the modern "sector". The process of socialization was viewed as one of rapid expansion of the social sector so that the weight of the private sector in the economy di- minished over time. After 1951 the practice of imposing crop patterns was  - 13 - discontinued, and in the following year the extremely unpopular system of compulsory deliveries came to an end. In March 1953 a law was passed by which production cooperatives could be dissolved and their land returned to the peasants who had contributed it. This resulted in a very sharp re- duction in the number of these cooperatives, particularly in the Vojvodina. Also in 1953 a further instalment of land reform was introduced, by which the 35 hectares limit on private holdings was brought down to 10 hectares, with the stipulation that the excess was to be made available only for state farms or cooperatives. In addition a new system of taxation was introduced according to which farmers were to be taxed according to the market value of their production. 1.43 The changes with respect to economic policy were accompanied by a series of complementary political and constitutional changes. In 1952 the Communist Party of Yugoslavia changed its name and formal status, and was reborn as the League of Communists. In 1953 the principal changes of the recent period were brought together and codified in a new Constitutional Act. Article 4 of the new constitution provided that: "Social ownership of means of production, the self- government of producers in the economy, and the self- government of working people in the commune, city and district represent the basis for the social and political system of the country." Besides providing a new basis for the Federal parliament and executive, the constitution of 1953 gave greater powers to the local authorities below the level of the republics. The districts, which were the next tier under the republics, acquired a share in local enterprise revenues together with some independent rights of taxation, while the size and responsibilities of the communes were increased. Nevertheless the Federal Government remained the dominant authority with respect both to taxation rights and the financing of investment. (iii) The Period of Elaboration and Consolidation, 1954-64 1.44 The development of the system after 1953 followed the general prin- ciples and the lines of development already enunciated - self-management de- centralization, liberalization and increased reliance on the market, as the Yugoslavs tried to work out the practical implications of the approach that they had adopted and discover how best, to implement the basic principles. In the event decentralization and self-management proceeded at two levels. First, decentralization at the political level increased autonomy for republic and local government and reduced the role for the Federal government. Se- condly, there was a reduction of state regulation and control over enterprise decisions at all levels (federal, republic and commune).  - 14 - Self-Management in Enterprises 1.45 The development of self-management of enterprises is illustrated by the evolution of the system of distribution of enterprise income 1/. Up to 1954 the enterprises had little control over their resources. The wage and salary system was fixed by the state which also determined the use of other funds. In 1954 a new system of determining net profits of enterprises was introduced under which the total wage bill was still determined on the basis of average salaries for specified categories of workers which were fixed in the social plan. However, the enterprise could distribute the total amount thus determined, among the workers in accordance with pay scales de- termined by the workers' councils. A proportion of the net profit could also be paid out to workers, but this proportion was determined by the state. The authority of workers' councils in this field was increased significantly in 1958 when a new scheme of income distribution within enterprises was adopted and implemented especially after some revisions in 1961. 1.46 The raised system dropped the idea of net profit and replaced it with that of net income. Net income was defined as gross revenue minus ma- terial costs, depreciation and taxes. It, therefore, was not yet of the wage bill. The allocation of the net income between personal income payments to workers and other uses was now entrusted to the workers' councils. This rep- resented the acceptance of the idea that workers' councils were responsible bodies, which would not pay out the whole net income in income to workers at the expense of "accumulation" and other enterprise funds. However, there was a tendency for sharp increase in wages after the system was adopted. Also enterprises found themselves in liquidity difficulties because insufficient attention had been given to financial conditions of the enterprise when de- termining the proportion of net income to be paid out in wages. Consequently guidelines for the allocation of net income between personal income payments and other uses were imposed again in 1962. 1.47 The guidelines aimed to discourage personal income payments above a prescribed minimum level, by imposing large obligatory payments from the net income. The payments were calculated as follows: from the net income, socially prescribed minimum personal incomes were deducted and the contribu- tions progressively related to the remainder. After these obligatory pay- ments were made there was little left with which the enterprise could play - add it to the socially prescribed minimum wage bill or use for other pur- poses. The major difficulty with the system was that there was no incentive for the enterprise to reduce costs because the resultant increase in the net income of the enterprise only increased the base on which the obligations were 1/ There were other developments indicating increasing self-management. For example until 1958 the directors of enterprises were appointed by a committee on which the enterprise had one-third representation. After 1958 half the members of the committee were from the enterprise. At present the workers' council appoints the director from a list ap- proved by the selection committee.  - 15 - calculated. The contributions were abolished in 1964 when the enterprises finally secured a greater control on the distribution of their net income. 1.48 The increasing control of the enterprises over the distribution of their income is illustrated by the increase in the proportion of enterprise income that was at their disposal in the form of net personal incomes, depre- ciation and enterprise funds. This proportion increased from 43 percent in 1959 to 55 percent in 1964 and 62 percent in 1966 1/. The Finance of Investment 1.49 The development of the system of investment allocation was a sec- ond area in which there was a gradual increase of decentralization and self- management. The Law on Banks passed in 1954 permitted communal banks to be established by local governments to supplement the role of the National Bank, and subject to its control. The banks were expected to collect savings and other funds of enterprises in their areas and control and execute the local governments budget. In addition three specialized banks were established for implementing the credit and investment policy of the government. The Bank for Foreign Trade was established in 1955 followed by the Investment Bank in 1956 and the Agricultural Bank in 1958. Funds were allocated to these banks from the Government's General Investment Fund and they were re- sponsible for financing the most efficient projects within rthe framework of the Social Plan. The increasing role of the banks in allocation of finance was expected to improve efficiency and economy in the use of funds, without eliminating the influence of government on the volume and pattern of invest- ment. In 1956 it was enacted that investment policy would be implemented by Yugoslav Investment Bank which would consider a number of criteria in allo- cating credit, including the proportion of internal financing of the project, the term involved in construction, the profitability of the project and its foreign exchange effect. It is not clear how these criteria were interpreted and what was the weight given to them. The banks acted primarily as agents for the distribution of state investment credits until 1963. Since almost all the resources of the banks came from the government its influence on credit allocation continued to be dominant. The decentralization of the investment decision in Yugoslavia did not take place until the mid-1960's. 1.50 The continued importance of the State in finance of investment is shown by its high proportion in total investment funds (Table 1.1). The relative unimportance of banks until 1964, when the state investment funds were abolished and added to bank resources, is also to be noted. 1/ The proportion of depreciation and enterprise funds to total net income increased from 18 percent in 1959 to 27 percent in 1964, i.e., by one- half.  -16- Table 1.1: INVESTMENT IN FIXED ASSETS BY SOURCE OF FINANCE (in percent) 1952 1955 1960 1962 1964 State 98 64 62 59 36 Work Organizations 2 35 27 37 32 Banks - I 1 3 32 Source: Statisticki Bilten No. 1, 1965. Decentralization and Self-Government 1.51 Parallel with the development of enterprise autonomy there was pro- gressive decentralization of the powers of the Federation to republics and local governments. The basic idea was that self-management at the terri- torial level meant increasing self-government by communities 1/. At the same time republic and local governments were given an increasing role in the "supervision" of enterprises in their territory, at least in the initial stages. Instead of centralized stare control at the Federal level enter- prises faced decentralized state regulation at the conmune level. 1.52 One aspect of this development was an attempt to make republic and local government financially independent of the Federation by developing their own revenue resources. As a zesult, while in 1943 about 54 percent of the total revenue of local and republic governments was derived from own sources, in 1954 the proportion had increased to about 73 percent. In general, how- ever, the locai governments were -not financially independent and continued to depend on sharing in Federal revenues and on subsidies from the Federal Budget for a significant proportion of their finances. The principle of separate revenue sources for each level of government was given up during 1960-64 but reintroduced in 1965. 1.53 The attempt to increase financial independence and resources was accompanied by a significant increase in the role of non-Federal governments in investment financing (Table 1.2). Tn particular the importance of the local governments continued to grow until 1964 when they accounted for one- fifth of total investment expenditure in the social sector and three-fifths of the investment expendit,,:e financed by the state. t/ "In daily life every man appears in a doub'e capacity: as a producer and as a citizen. Thus direct democracy will also have two aspects: one relating to the work place, the other to the territcry where citizens live." Horvat, op. cit. page 153.  - 17 - Table 1.2: INVESTMENT IN FIXED ASSETS FINANCED BY THE STATE BY LEVELS OF GOVERNMENT (in percent) 1953 1955 1960 1962 1964 Total Government 100 100 100 100 100 Federation 97 73 60 51 19 Republics 2 14 11 15 22 Communes and Districts 1 13 29 34 59 Source: Yugoslav Survey, 1963, page 2167 and Statisticki Bilten. 1.54 The law on local self-government adopted in 1955 stated that the commune was "the basic political - territoral organization of self-govern- ment", and gave it a variety of functions and responsibilities, both legis- lative and administrative. Its functions include the preparation of a social development plan for the area, the supervision of economic enterprises and the provision of municipal services and infrastructure including not only public utilities but also services like education, roads and hospitals. Communes are also responsible for the social property on their territory including that under the control of enterprises in their area. The com- munal government has an important (initially a decisive) voice in the ap- pointment of directors of enterprises. It also approved the wage schedules of individual enterprises since 1954 and continued to do so, even after the system of "net income"' was adopted in 1958. The communes were also the founding members of the communal banks of which there were 206 in 1964 11. Hence the Communes were, and are, an important factor in financing enterprise investment. 1.55 The growth in the importance of local self-government was accom- panied by a reduction in the number of communes, and an increase in their average size. The total number of communes declined from 4,156 in 1953 to 500 in 1970 and the average population per commune increased from 4,000 to about 40,000. The main reason for this tendency was that large communes could benefit from economies of scale in various commune activities. There also developed a large degree of intercommune cooperation for the pursuit of 1/ Communal banks disappeared subsequently as an attempt was made to re- duce the narrow territorial approach communal banks tended to have. As founder members commune governments continue to have influence on lend- ing policies of the commercial banks that replaced the communal banks.  - 18 - joint interests, e.g. in infrastructure 1/. Since the larger average size of the communes implies less direct self-government, local communities have been created for specific localities within the commune since 1963, with their own system of self-government 2/. One factor that affects the real degree of self-government in the commune is the question of resources. In 1960 only 9 percent of the communes were able to cover their needs. All others had to rely on higher levels of government for subsidies and other financial help. Five-Year Plan, 1957-61 1.56 The second Five-Year Plan (1957-61) marked a return to medium-term planninS after some years of annual plans. The period of annual plans had been used to a large extent to complete projects initiated during the period of centralized planning and, therefore, was characterized by the development strategy of the earlier period. During the second plan there was a re- orientation of the pattern of development from one emphasizing heavy indus- tries and producer goods to one encouraging the produiction of consumer goods and finished products with the object of improving standards of living. The shift is termed in Yugoslavia as one from "intensive" to "extensive" pattern of development. The plan aimed at a growth of standard of living of nearly 8 percent per year and at the elimination of shortages and bottlenecks aris- ing from the earlier pattern of development, through a faster development of agriculture and industries producing final goods. The plan was very success- ful and was declared completed in 1960 when most of its targets were fulfilled. 1.57 The emphasis on agriculture marked a significant change. The ob- jective was to increase production so that food imports would not be a burden on the balance of payments. The role of the peasant in attaining this ob- jective was recognized, and cooperation between peasant farmers and the social sector in agriculture was encouraged both as a method for getting higher production as well as for demonstrating to the peasants the advantages of socialized agriculture 3/. Investment in agriculture was increased both through the newly-founded Agricultural Bank and through the investment funds. The increase of relative prices of agriculture commodities improved the terms of trade for agriculture and was an important incentive for growth of output 4/. 1/ Yugoslav Survey, July - September, 1965, "Inter-Commune Cooperation". 2/ In 1971 there were over 8,000 local communities. "Local Communities - Development and Results", Yugoslav Survey, August 1972. 31 See The Progr,amme of the League of Yugoslav Communists, Belgrade, 1958, Pages 149-50. 4/ Between 1956 and 1962, the index of producers' prices in agriculture increased by 64 percent compared to an increase of 14 percent in in- dustrial producer prices.  - 19 - 1.58 While significant progress towards decentralization and self-man- agement had been made by 1964 it was much less than would appear at first sight. There continued to be a large degree of central control of the econ- omy, and particularly of investment in the interest of coordination and stabilization or for ensuring what were termed the "basic proportions" of development. The emphasis placed on achieving greater regional equality was another reason for central intervention in investment allocation. There was also a large degree of control of prices and wages. The state continued to control the prices of 70 percent of the products and thus exercised a strong influence on the pattern of decentralized resource use. In the field of foreign trade as well, the failure of the attempts to reduce controls in 1952 had been followed by an increase in restrictions, and second major re- form of the foreign exchange system in 1962 was also not very successful. The relatively slow progress was partly the normal concomitant of the prob- lems of developing a new and in many ways, unique economic system. The process of "learning by going" was a difficult one. In addition, there were also some resistance to the ideas of the new economic system and its implications which slowed the process of decentralization and self-manage- ment. Such views were increasingly voiced in 1961 and 1962 when there was a slowdown in the rate of growth. This was attributed to the significant increase in enterprise autonomy that occurred in 1961, and a return to the old system of income distribution in enterprises and greater state influence in investment allocation was demanded. The ideological opposition was de- feated. The Constitution of 1963 and the Eighth Congress of the League of Communists of Yugoslavia in 1964 reaffirmed the basic principles of Yugoslav development. The New Constitution, 1963 1.59 The new constitution, which is still in effect though with major amendments, summed up the progress of the preceding decade and set the stage for the next steps in the evolution of the system, It was presented by Kardelj as "not only the constitution of the state but also a specific social charter which will provide the material basis for the faster internal development of the system of social self-government," and stated that "the basis of the social economic system of Yugoslavia is free, associated work with socially-owned means of labor and self-management of the working people in production and in distribution of the social product in the working organization and social com- munity." The citizens' right to "social self-management" was stated to be "inviolable" 1/ and was to be applied in all spheres of economic, socia]L and political life. The constitution defined in greater detail thlan before the institutions for local government and gave greater importance to the commune. It also incorporated the progress made in the development of workers' self- management. The Federal Assembly was reorganized with five chambers - the Federal Chamber (incorporating the Chamber of Nationalities), the Chambers of Economic Affairs, Education and Culture, Social Welfare and Health, and 1/ The quotations are from Article 6 and Article 34.  - 20 - Political Organization 1/. Representation in all the chambers was on the basis of population except in the Chamber of Nationalities in which each republic had equal representation, and the two autonomous provinces had half of that of a single republic. Election to all the chambers except the Federal Chamber was indirect, through communal assemblies. Representatives to the Federal Chamber were to be elected from candidates nominated by the communal assemblies through direct election in each consistency. There was an attempt to enforce wide participation of the people in the process of government by providing that no one could be elected to the same chamber more than twice consecutively. (iv) The Economic Reform, 1965 1.60 There was increasing dissatisfaction with the progress made in es- tablishment of a decentralized market oriented self-managed economic system by the mid-1960s. As mentioned a large degree of government control on prices continued. There were several reasons for this. First, the price system was used as an indirect way of regulating the allocation of resources and influen- cing the investment and production decisions of enterprises. It was one way of achieving the "basic proportions" of development. Secondly, to prevent high costs and price escalation of finished goods, prices of power, raw mat- erials and intermediate goods were kept low and a complex system of subsidies and compensation was maintained to keep enterprises in these activities solvent. Thirdly, in general, given the high rate of investment, the restrictions on im- ports, the tendency for wages to rise and large fluctuations in agricultural production, there were strong inflationary pressures as well as a tendency for monopolistic price increases, and price control was an important weapon for suppressing inflation. "Consequently, the practice of administrative interference of the economy was longest and most extensively retained in the price sector." 2/ The system of prices was the major object of attack. It was argued that administrative control of prices may have been acceptable in an underdeveloped agrarian economy but Yugoslavia had passed beyond that stage. The complex production structure that had been created was being inhibited and distorted because of price controls. The recession in the rate of economic growth in 1961 and 1962 led to serious questioning and this was intensified during years immediately following when there were severe balance of payments difficulties. Exports of goods averaged two-thirds of the imports during 1962-64, and for the convertible area only three-fifths. 1/ The assembly system was modified by a constitutional amendment in 1968. The Chamber of Nationalities became an independent unit at that time. The Chamber of Nationalities represented the continued importance of the complex nationalities problem in Yugoslavia. It was to meet oc- casionally when questions relating to the equality of rights of re- publics and nationalities arose or when demanded by the majority of delegates of any republic. 2/ "Price Formation and Social Control", Yugoslav Survey, February 1968, page 51.  - 21 - The balance of payments question was crucial for the future with the expected decline in external assistance on soft terms. The problem was attributed to rapid increase of imports. (Imports of goods increased at about 27 percent per year during 1960-64). One reason for this, it was claimed, was domestic price policies, which, by depressing raw material prices, led to a relatively slow development of the domestic resource base, at a time when final goods production, and therefore, industrial raw material needs were expanding. The domestic price system, which sheltered domestic industry from international competition through restrictions in foreign trade, was also blamed for the relatively poor export growth. Producers of final products preferred to sell on the domestic market and exports had to be subsidized. In 1964 export sub- sidies totalled 2.7 billion dinars or 20 percent of the value of exports 1/. 1.61 Other aspects of the inefficiency of past development were also causes for discontent. Despite the rapid growth and the institutional devel- opment of the 1950s there continued to be a great emphasis on high rates of investment. These were secured at the expense of slower growth of private consumption. The share of private consumption in GNP declined from 56 per- cent in 1957 to 51 percent in 1964. During the same period private consump- tion per capita increased at 4.4 percent per year while per capita investment increased at 8 percent per year. It was believed that the time had arrived for a modification of priorities between investment and consumption. It was also believed that the slow growth in per capita consumption was largely a result of the "extensive" pattern of development in Yugoslavia, in which in- creases in employment rather than of productivity per worker were emphasized 2/. It was argued that for greater efficiency, competitiveness and higher standards of living of the workers (in the social sector) a shift to an "intensive" pat- tern of development was needed. 1.62 A third aspect of development during the past decade that had be- come increasingly suspect was the system of investment allocation. Though there had been significant progress in the diversion of resources from the federal level to republics and local governments and to the enterprises, the federal government was the largest single source for investment funds. Since the Federal General Investment Fund was allocated among enterprises, republics 1/ D. Bilandzic, Management of Yugoslav Economy, 1945-66, Belgrade, Yugoslav Trade Unions, 1967, page 109. 2/ The fixed capital stock and the total employment in industry and mining change as follows: 1952 1956 1964 Capital per worker (1966 prices) 100 133 270 Employment 100 136 214 Consequently the value of fixed assets per worker in 1964 was only 26 percent higher than in 1952.  - 22 - and communes either directly or through the banking system the Federation had almost full control on investment allocation through a process of leverage 1/. The banks, since they operated with state funds, were, therefore, subject to its influence. A second aspect of investment allocation, which was also ques- tioned, in the late 1950's, was related to the regional development question. In the system of investment financing, the designated underdeveloped regions received special privileges 2/. It was widely argued, particularly by the representatives of the developed regions, that this policy led to significant distortions in resource allocation and had encouraged waste. 1.63 As a result of all these factors, the Economic Reform of 1965 was carried out and the Yugoslav economic system was given its, more or less, present shape. The period 1950-65 has been called that of the birth of the self-management system (D. Bilandzic op. cit, page 125). The Reform consisted of a number of measures adopted during 1964-67 which were designed to achieve three major objectives: (a) to give greater autonomy to the enterprises and limit the role of the state in the economy by reducing the taxation of enter- prises and leaving to them decisions on investment; (b) to correct by major price adjustments the long standing distortions in relative prices and thus improve the pattern of output and investment; (c) by devaluing the dinar, approximately halving customs tariff rates and liberalizing imports and the foreign exchange regime, to integrate the economy more closely with the world economy and exert pressure on Yugoslav enterprises to increase their effi- ciency. The measures were adopted over a number of years with the reduction in the taxation of enterprises occurring in 1964, the devaluation and the principal price adjustments in July 1965 and the liberalization of the for- eign exchange regime in January 1967. 1.64 The Economic Reform involved a major reorientation of economic policy and strategy which has dominated the pattern of development in sub- sequent years. This reorientation is clearly ennunciated in the Social De- velopment Plan 1966-70 which was adopted in July 1966 3/. The first "basic intention" of the Plan 4/ was "to ensure a gradual redistribution of national 1/ As stated the Federal .7unds financed only a part of any project, the rest having to be financed by the borrower from own funds. Thus "the central investment fund appears as an instrument for directing the use of the decentralized investment funds left with the enterprises and local authorities". B. Kubovic and V. Trickovic, National and Regional Planning in Yugoslavia, Belgrade, Federal Planning Bureau, Research Division, Regional Development Division, 1961. 2/ See Chapter VIII. 3/ The actual targets of the Plan were abandoned following the unfavorable development of the economy during 1966-68. However, the fundamentals of development strategy were not changed. 4/ R. Stajner, "The Fundamentals of Yugoslavia's 1966-70 Social Develop- ment Plan", Yugoslav Survey, 1966, page 3862-3.  - 23 - income in favor of personal incomes, so that they may not only bring about an improvement in the standard of living but also become a factor conducive rational production and spending." Increase in personal incomes would be an incentive for increasing productivity and efficiency of resource use. Secondly, the Plan emphasized the "intensification of socio-economic ac- tivity." It was stated that while in the 1950's labor productivity accounted for only 10 percent of production and income gains, the proportion would be 70 percent during the Plan period. Thirdly, to allow "integration of the Yugoslav economy in the international division of labor" (quotations from Stajner loc. cit.) it was necessary to achieve rapid export growth, which itself depended on the rapid adoption of modern technology in production. Production itself would be reoriented away from the domestic market "to what is profitable to produce in world proportions." Fourthly, to attract modern technology and to improve efficiency, foreign investment was to be encouraged. Fifthly, the role of the state in investment decisions was to be reduced significantly partly by reducing its role in investment finance. In 1963 the various state investment funds were abolished, and the resources transferred to the banks. It was envisaged that "in the future, the Federa- tion will no longer dispose of the present amount of investment funds... but will only accumulate and build up funds indispensable for the development of underdeveloped regions." (Stajner, loc. cit. page 3866). 1.65 The Economic Reforms were successful in bringing about a large degree of decentralization of decision making and in re-orienting the pat- tern of economic development in Yugoslavia, in the stated directions. This is clear from the selected indicators in the Table below. Table 1.3: SELECTED INDICATORS 1952 1961 1965 1970 1. Share of Private Consumption in Social Product (1966 prices) 58.4 53.3 50.9 55.1 2. Share of Federal Republic and Local Governments in Finance of Total Investment (Current prices) 78.0 61.8 36.5 15 3. Index of Capital Stock per Worker (Industry) 100 113 132 132 4. Share of Industrial Commodities Under Price Controls - - 80 43 5. Share of "Liberalized" Imports - - - 30 6. Exports as Share of CGP (1966 prices) 10.3 14.3 18.2 20.7  - 24 - However, the Reform required radical readjustment within the economy. Also in order to stabilize prices the Reform was accompanied by a tight monetary policy. Consequently the period 1966-68 was marked by unemployment and stag- nation while the Reform was implemented. The resumption of rapid economic growth in the middle of 1968 and the boom of 1969 and 1970 brought to the forefront issues of economic stabilization, of coordination of economic policies and investment decisions, and of balance of payments deficits which are discussed later in this report 1/. (v) Nationalism and Constitutional Change 1.66 The growth of decentralization was accompanied by a surfacing of nationality question. It has not been a part of Communist party thinking to ignore the question. The program adopted by the 7th Congress of the LCY (1958) emphasized that the creation of a "new Yugoslav consciousness" did not mean the giving up of national identity by the people of different nationalties. At the 6th Congress (1964) Kardelj stated that "the point of departure in economic relations between the nationalities is economic independence for the people of each nationality" 2/. The amendments to the Constitution of 1963 adopted in 1968 gave increased rights and responsibilities to the re- publics. The structure of the Federal Assembly was modified and the chamber of Nationalities was given much greater importance. There was concommitantly an improvement in the position of ethnic minorities. The Constitution of 1963 provided that in areas with mixed populations all nationalities would be represented in government and in workers' councils in proportion to their numbers in the population. The constitutional amendment of 1968 gave a "fuller, more independent constitutional and legal status" to the auton- omous provinces of Kosovo and Vojvodina. 1.67 The Constitutional Amendments adopted in July 1971 are the most significant steps in the development of the economic system since the Reform. First they carried much further the trend towards greater self-management of republics (nationalities). Secondly, they mark a major step in the de- velopment of the system of self-management in enterprises. Thirdly, they established a collective Presidency at the Federal level in preparation for President Tito's eventual retirement from the active political scene. Fi- nally, they established a new institutional framework for coordinating eco- nomic policy and decisions. The changes in the legal framework required to implement these changes has not yet been completed. However, as brought out in this report, after an initial period of adjustment and dislocation the new system has begun to work. 1/ See Chapters IX and XI. 2/ "Practice and Theory of Socialist Development in Yugoslavia", the basic documents of the 8th Congress of the LCY, Belgrade, 1965, page 100. Kardelj went on to point out that "there can obviously be no question only of independence but interdependence as well."  - 25 - 1.68 The republics and autonomous provinces now have more economic responsibilities, while the authority of the Federal Government has been narrowed and redefined. Major economic (particularly fiscal) responsibil- ities were transferred to the republics and autonomous provinces. National defense, internal security and foreign policy as well as the Fund for UJnder- developed Regions continue to be Federal responsibilities. The Federal Gov- ernment also retains executive and coordinating functions for monetary policy; foreign exchange policies; the control of prices of basic commodities and services; and certain tax and expenditure policies. The extent of federal competence in these fields is, however, normally limited by the necessity to secure agreement of the republics and autonomous provinces before new measures can be undertaken by the Federation. The Federal Government, how- ever, retains sufficient initiative and control in the form of its respon- sibility for maintaining the unity of the Yugoslav market as well as emer- gency powers. 1.69 Since important matters cannot be decided without the approval of all republics and provinces, five Inter-Republican Committees were established to deal with (a) development policy, (b) foreign trade and foreign currency system, (c) the monetary system, (d) internal market matters and (e) finan- cial matters. Each committee is chaired by a member of the Federal Govern- ment. There is also a Coordination Committee consisting of the President of the Federal Government, the presidents of the Governments of the republics and autonomous provinces, and five members of the Federal Government. There are intricate rules for approval of legislation where there is disagreement among the republics and to allow for the continuity of government while dis- cussion continues. The Social Development Plan is also an important instru- ment for coordinating economic policies at different levels. 1.70 A system of "social agreements" and "self-management agreements" was created as a major new technique for coordination of economic behavior of enterprises. The system, which involves tripartite "social agreements" between the state, the trade union and the enterprises, and subsequent "self- management" agreements among enterprises in the same branch of activity, has been used, at first, mainly to develop and implement an incomes policy. The agreements are binding on the enterprises that enter into them. While enterprises are not forced to enter these agreements, the federal, republic or local government can proclaim a "social agreement" as generally binding, if the enterprises are unable to negotiate a "self-management" agreement. 1.71 The constitutional amendments and the proposed implementing legis- lation included basic changes affecting enterprises that are likely to have significant effect in the long-run. An enterprise was given the right to in- vest funds in another enterprise and claim in return a part of the surplus. This could eventually have far-reaching implications for the mobility of capital, mergers, and the emergence of conglomerates. Joint ventures among domestic enterprises may become more frequent in the future. On the other hand, a sub-unit of an enterprise may invoke the right of self-management and constitute a separate organization provided it does not violate contrac- tual oblications. In a further effort to attract foreign firms into joint ventures with Yugoslav firms, it was stated that the rights of foreign part- ners cannot be diminished by changes in legislation enacted after a joint  - 26 - venture contract has been finalized. To the extent that foreign firms have been inhibited during the past by uncertainties about their legal status this may help to increase joint ventures. 1.72 Since the new system relies on consensus, every republic has, in effect, the power of veto. The process of reaching agreement on policies and solutions is sometimes cumbersome and slow and there may be a tendency for recourse to ad hor and temporary measures on difficult issues while consensus is being hammered out. It must also be remembered, in this con- text, however, that the constitutional amendments to a certain extent only formalized a situation that had gradually emerged. Reconciliation of re- public interests and aspirations had already become a major factor influenc- ing and sometimes delaying federal action even before 1971. 1.73 The Yugoslavs point out that one of the advantages of the recent changes giving explicit recognition to the views of the republics, is that policy decisions, once made, reflect an agreement and are therefore more likely to be implemented than in the past. The delays in arriving at policy understandings is, in their view, more than compensated by the greater cer- tainty of the eventual outcome. It is also argued that as the republics are now responsible for many facets of development they can take decisive steps more speedily to resolve their own specific problems. C. The Present Institutional Framework (i) The Federal, Republic and Local Governments 1.74 The structure of the govermuent gives explicit recognition to the different nationalities and republics. The political structure of the Federal Government is shown in Chart I. It is guided by a Presidency consisting at present of 23 members, but on the retirement of President Tito, of 22 members. The Presidency will then consist of three members from each republic and two members from each autonomous province. Members are nominated by their re- spective republics and approved by the Federal Assembly for a term of five years. The executive branch of the Federation is the Federal Executive Council (FEC) which consists of 28 members chosen from among the republics for a term of four years on the same representative basis as the Presidency. The Federal Assembly is a five chamber body. All legislation has to be ap- proved by the Chamber of Nationalities and by one of the other four chambers depending on its competency. For economic matters, the Economic Chamber has to give its approval.  -27- ,hart; POLITICAL STRUCTURE OF THE FEDERATION THE PRESIDENT OF THE SFRY COMMANDER-IN-CHIEF FEDERAL ASSEMBLY PRESIDENCY OF THE COUNCILS OF THE PRESIDENCY -Chamber of SFRY -Foreign Affairs Nationalit es -Peoples Defense -Chamber of -State Security Economy -Economic -Chember of Social Welfare & Health -Social-Political Chamber -Cultural and Educational Chamber COORDINATING FEDERAL EXECUTIVE iNTER-REPUBLICAN COMMITTEES COMMITTEE COUNCIL ~~~~~~~~~~~~-Development Policy COMMITTEE COUNCIL ~~~~~~~~~~~~-Foreign Trade and Currency System -Monetary System -Market Matters -Finance Matters FEDERAL EDERAL FEDERAL SECRETARIATS DIRECTORATES ADMI NISTRATION INSTITUTES -Foreign -Food -Customs -Social Affairs Reserves Authority Planning -Finances -Reserves of -Civil -Prices -Peoples Industrial Aviation -International Defense Products Authority Scientific, -Internal -Yugoslav -Geodetic Educational, Affairs Free Zone Authority Cultural and -Economy in Salonika -Radio Technical -Foreign Broadcasting Cooperation Trade Authority -Statistics -Labor -Hydro-Meteorology Social -Industrial Welfare Standards -Judicial and -Patents General Admin. -Weights anci Affairs Measures and -Agriculture Precious Metals -Transport -Geology -Prices World Bank-8165  - 28 - 1.75 The governments of republics and autonomous provinces are organized on the basis of their own constitutions on similar lines as the Federal gov- ernment except that there is no equivalent for the Presidency and no consti- tutionally established committees for coordination. The republican assembly also has five chambers in line with the Federal Assembly and the executive council of the republic is responsible for the implementation of policies adopted by the assembly. 1.76 Local government at the commune level, and even below at the level of local communities is a most important element in self-government. The communal assembly consists of two chambers, one elected by all citizens and the other by employed personnel. In addition to the elected chambers there are commissions, councils and committees established for specific purposes. (ii) Enterprises and Workers' Self-lanagement 1.77 The basis of the Yugoslav economic system is the workers' managed enterprise or "work organization" 1/. The enterprise is an autonomous body with the status of a legal person, with freedom to contract for capital goods, raw materials and workers. The assets of the enterprises are social property but it can mortgage or dispose of them. The enterprise is free to determine what to produce, how to produce it, how much of it to produce and, in principle, the price of its product. 1.78 An enterprise can be established by any group of persons but it is usually set up together by communes and other working organizations, which are termed its founder members. Although the founder members have influence in the early stages of the enterprise, once the enterprise is operating fully it comes under the control of the workers. 1.79 The management of an enterprise is carried out by a workers' coun- cil elected by all the employees (the work collective), a Managing Board elected by the workers' council and a Director, appointed by the workers' council and approved by the Commune. Where an enterprise consists of less than 30 persons there is no elected workers' council and the whole working community acts as a council. This arrangement is also legally permissible in any working community with up to 70 persons. W4here the enterprise is larger than 70 persons, the workers' council must consist of a minimum of 15 persons but there is no maximum. 1.80 Wfhen an enterprise has less than 10 working members, there is no Managing Board but beyond that number of persons, a Mlanaging Board must con- sist of a minimum of 5 persons, once again without any maximum. The Director of the enterprise attends meetings of the workers' council and is a member of the Managing Board. The management of the enterprise, including decisions on basic policy, is the responsibility of the workers' council and the Manag- ing Board, while the responsibility of the implementation of decisions and for the organization of production is given to the Director alone. 1/ The term "work organization" includes, not only business enterprises but all organizations in the field of public services, research, educa- tion etc.  - 29 - 1.81 The workers' council meets collectively. Its members are elected by the vote of all the workers and each member serves for two years with half the members being elected annually. To ensure wide participation no person can serve more than two terms consecutively. The workers' council decides on the internal relationships in the enterprise, adopts economic plans and annual financial reports, decides on the utilization of funds and the distribution of the enterprise earnings between personal income and investment. The workers' council also decides matters concerning em- ployment and dismissal of personnel. 1.82 In all large enterprises there have been distinguished, since 1959, economic units termed "basic units of associated labor" with important self- management rights. The units are distinguished on the basis of technological, economic or other characteristics. Each unit of an enterprise is entitled to elect a workers' council and usually there are workers' councils for eaclh unit and a separate workers' council for the enterprise as a whole (see Chart II). The workers' council of each unit is permitted to take individual deci- sions applicable within the unit as long as their decisions do not harm other units of the enterprises.  - 30 - Chart If SELF-MANAGEMENT AT DIFFERENT LEVELS OF A LARGE ENTERPRISE, 1971 |GENERAL MEMBERSHIP |OF ENTERPRISE WORKERS COUNCIL (MANAGING BOARD] DIRECTOR OF OTHER ENTERPRISE DEPARTMENTS | WOFRKERS l | WORKERS | COUNCI L l lCOUNCIL | MANAGING | | MANAGING BOARD BOARD DIRECTOR OF DIRECTOR OF PLANT DEPARTMENTS | ECONOMIC E|omiECONOMIC |ECONOMIC UNITS I UNITS l UNITS UNITS COUNCIL OF COUNCIL OF ECONOMIC UNIT ECONOMIC UNIT SUPERVISOR | SUPERVISOR OF ECONOMIC | OF ECONOMIC UNIT World Bank-8166  - 31 - 1.83 When an enterprise has not been operating successfully and not been able to meet the income payment of its members, it is usual to appoint assignee management, usually chosen by the commune. Such assignee manage- ment is limited in the first instance to one year though this can be con- tinued, where necessary. In earlier times the choice of the Director was made jointly by the commune and the workers' council, but in 1968 the re- sponsibility of the choice of the Director was given to the workers' coun- cil alone, although the short list of names from which the appointment is made was to be drawn up in consultation with the commune. 1.84 The role of the Director in the enterprise has come in for much discussion and criticism. A proper balance (coordination) between manage- ment by the Director and self-management by the workers is not always found in practice though in theory it may be. The workers' council is supposed to formulate policy while the Director is to implement it; the workers' council is supposed to make the basic decisions while the Director is supposed to make the day-to-day decisions. 1.85 The Director is given the responsibility to ensure that the enter- prise fulfills its legal obligations and does not ignore its social respon- sibilities. In addition the social responsibility of the enterprise is also ensured through a wide range of financial and accounting regulations, inspec- tion and control of the Social Accounting Service, tax and credit and price policies, the economic associations and chambers of economy, social and self- management agreements as well as the influence of the commune, the Association of Trade Unions, and the LCY. Competition among enterprises is regarded as a strong influence against non-social behavior by enterprises. An important change in the legal framework is presently under discussion. It would make all the workers in an enterprise responsible for any non-legal actions of an enterprise that they are cognizant of. 1.86 As pointed out the evolution of the system of income distribution within an enterprise has been one index of the growth of enterprise auton- omy 1/. The system existing at present is illustrated in Chart III. The gross income of the enterprise is its total receipts from which the cost of materials, tax payments and depreciation are deducted to yield the net income of the enterprise. The allocation of the net income between personal income payments and accumulation of funds is decided by the workers' council of the enterprise within general regulations of allocation to certain funds, e.g. the housing fund. The personal income is distributed by economic units which usually have their own reserve funds and funds for incentive payments. Only 1/ See J. Kolaja, Workers' Councils: The Yugoslav Experience (London, 1965), B. Ward "The Nationalized Firm in Yugoslavia", American Economic Review 1965, pages 65-74: B. Horvat and V. Kaskovic, "Workers' Manage- ment in Yugoslavia: A Comment: Journal of Political Economy, 1959, pages 194-198; "Workers' Self-Management in Economic Units," Yugoslav Survey No. 12, 1963, pages 1690-1704.  - 32 - after these have been deducted is the individual's income determined. Thus the worker's personal income consists of various components: (a) basic salary established for the job, (b) bonuses paid by the economic unit for exceptional performance, (c) share in the "profits" of the economic unit because of its superior performance, (d) share in the "profits" of the enterprise determined by market conditions etc. Thus the worker does not know his actual receipts during (say) the year in advance, but only his basic salary and, to some ex- tent, the incentives for superior performance.  *~~~ ~ ~ ~ ~ ~ B DISTRIBUTION OF INCOME WITHIN AN ENTERPRISE, 1971 TOTAL REVENUE ] minus COST OF OPERATION | (including taxes but excluding wages and salaries) equals NET INCOME ACCUMULATION AND FUNDS PERSONAL INCOME TO ICOMMON FUND WORKING CAPITAL RESERVE FUND RESERVE FUND SOCIAL WELFARE AND CASH (legally required) (optional) FUND BALANCES, TO ECONOMIC UNITS ECONOMIC UI PRIZES PERSONAL RESERVE AND INCOME OF FUND BONUSES ECONOMIC UNIT C) INDIVIDUAL INCOMES I-I-  - 34 - 1.87 The role of the workers' councils and the autonomy of Yugoslav enterprises has been the subject of much study and debate 1/. One view is that the Director is actually in control of the management of the enter- prise because being better informed he can "manage" the decisions of the workers' council. Another line of thought is that the councils themselves are controlled by the better educated, highly-skilled workers, so that the system represents management by an elite group in the enterprise. There is some evidence that the proportion of representation of the "middle class" - skilled and highly skilled manual workers and employees with secondary and lower school education - has increased in workers' councils (Table 1.4). The total of the middle four groups in workers' councils increased from 63 percent in 1960 to 73 percent in 1970. Table 1.4: MEMBERSHIP OF WORKERS' COUNCILS AND MANAGING BOARDS, 1960 AND 1970 1960 % 1970 % Manual Workers 117,965 76.9 91,323 67.5 Unskilled 112,420 7.3 10,305 7.6 Semi-Skilled 20,805 13.6 12,234 9.0 Skilled 62,685 40.9 45,497 33.7 Highly-Skilled 23,133 15.1 23,287 17.2 Other Employees 35,489 23.1 43,881 32.5 Lower Education 917 0.6 8,699 6.5 Secondary Education 10,306 -6.7 21,558 15.9 Professional Education 17,967 11.7 5,547 4.1 High Level of Professional Education 6,299 4.1 8,077 6.0 Total 153,454 100 135,204 100 Source: Statistical Yearbook, 1961 and 1972. 1.88 In any discussion of the question three factors must be kept in mind. Firstly, who really controls the working of the enterprise is to some extent a metaphysical question which could be answered differently at differ- ent levels of philosophical abstraction. Secondly, it is clear that the degree of workers' control varies between enterprises and between branches of activity. 1/ V. Rus, "Influence Structure in Yugoslav Enterprise", Industrial Rela- tions, February 1970, E. Blum "The Director and Workers' Management" in Yugoslav Workers' Self-Management (Editor), M.J. Brockmeyer, (Hague, 1970) and I. Adizes, Industrial Democracy: Yugoslav Style" (New York, 1971).  - 35 - It is also not static, but changes over time with directors and the leadership in the workers' councils and Managing Boards. Thirdly, the workers' councils do not control the day-to-day working of enterprises and are not meant to do so 1/. They lay down general policies and have to make important decisions though they do not always do so. The fact that the Director has to be re- elected every four years is an important safeguard. Further, self-management rights are constitutionally guaranteed and their violation by an autocratic director may, and sometimes does, lead to criminal prosecution. It is our judgement that the system does, in practice, incorporate a large degree of workers participation and involvement in enterprise decision making and marks significant progress towards the workers' self-management ideal. 1.89 More significant economic issues are related to the efficiency of the system of workers' management in the allocationi and mobilization of re- sources. Economic analysis as well as experience have pointed out several problems that could face an economy based on workers' self-management. Firstly, the workers may pay out an excessive proportion of enterprise in- come in personal income payments and leave relatively inadequate amounts for reinvestment. This danger has always been recognized. In the early years, attempts were made to limit enterprise autonomy in the allocation of its income to ensure a sufficient level of enterprise savings. A recent innovation has been to introduce a system of social agreements between in- volved parties (governments, trade unions, enterprises) to regulate the proportion the enterprise pays out in personal incomes. Secondly, it has been argued that the incentive to invest by enterprises would be relatively weak under self-management because savings out of the personal income of the workers would belong to them while amounts reinvested in the enterprise are in social ownership. In fact, reinvestment rates by enterprises have been fairly high, partly because the low real cost of borrowed funds in an inflationary environment encourages borrowing for investment purposes and banks in making loans require a certain proportion of enterprise own f'unds to be used for the investment being financed. Also, given the relatively low mobility of labor the workers do gain in the shape of higher personal incomes in the future if the enterprise maintains a high rate of investment. In addition if the enterprise expands, job opportunities are created for mem- bers of the worker's family. Another reason for Iigh investment rates by Yugoslav enterprises has been the low degree of risk that investment involves for workers. The decentralization of the investment decision has not been accompanied by a significant decentralization of the risks. Enterprises and workers making poor investment decisions do not have to pay commensurate financial penalties because the state guarantees minimum levels of personal income. Thirdly, there is a bias towards capital intensive techniques of production which may imply misallocation of resources in workers' managed enterprises. If the enterprise aims to maxinize net income per worker it would tend to maximize the product per worker and this would give a bias 1/ In Energoinvest, the workers' council of 100 members, (representing 13,500 total workers in 1970) meets once every three months. Blum, op. cit.  - 36 - towards capital intensive tecnniques which add to enterprise income without adding- to those who share in it. Fourthly, there may be allocative ineffi- ciencv resulting from the lack of mobility to capital. The savings generated in an enterprise tend to be invested in it rather than moving to possibly more productive uses through the channel of capital market. The Yugoslavs have not yet come up with an institutional substitute though a number of developments have occurred. Constitutionally, enterprises are allowed to invest funds in other enterprises and receive payment. Cooperation in production and trade between enterprises with contractual interenterprise transfer of funds has also emerged. however, much progress has yet to be made for efficient inter- mediation of investment funds 1/. (iii) The Banking System 1.90 Since the mid-1960s the role of the banks in financing investment nas increased sharply. Following the Banking and Credit Law of 1965 any group of economic or political organizations could set up a bank by sub- scribing the legally determined minim.um of the initial "credit fund" (equity capital). Each participant (founder member) is represented in the bank's Assembly (the highest managing authority) in proportion to its subscription, subject to an upper limit of 10 percent of the voting power. The limit is mainly designed to prevent bank policy being dominated by a state unit or one or two large enterprises. All banks are permitted to operate throughout Yugoslavia and their activities cannot be limited by the local governments of territories in which they operate. A Bank Assembly decides on business policy, conditions for granting credits, agrees on the division of income, elects the Executive Committee, and appoints members of the Credit Committee and the manager of the bank. The Executive Committee carries out the business policy laid down by the Assembly, while the manager, appointed by the Execu- tive Committee after a commission has held a public competition, is respon- sible for the day-to-day activities of the bank and is an ex-officio member of the Executive Committee. Under the new law passed in 1971 the income earned by the bank is divided among the founders of the bank, but socio- political communities do not share in this division. Also conditions are laid down preventing a bank from granting credits to one client exceeding 30 percent of the total investment of the bank. 1.91 The banking system is regarded as playing a crucial role in the mnobilization of savings and their allocation to the most efficient use. In fact the allocation of funds has tended to be influenced by many other con- siderations apart from "profitability" of projects including governr.ent pol- icies and the founder members who are also the chiief borrowers. The power of "founder members" is seen in the relatively low interest rates that have persisted despite the removal on ceilings on interest rates in 1971. The banks have, however, also come in for criticism as being too powerful in determining the allocation of funds, and being a serious hurdle to greater autonomy of workers' self-managed enterprises. The legal provision in the 1/ Chapter X.  - 37 - banking law of 1971 which vested the control of the funds generated through the operations of the bank, in the founder members was at least in part, a reaction to what was regarded as arbitrary misuse of these funds by the bank managers. 1.92 The feeling that banks are too powerful has been encouraged by the merger movement among the commercial banks. In 1966 there were 111 banks. In 1970 their number was reduced to 64. These mergers have resulted in thle emergence of some very large banks with practically a national field of op- erations. However, the mergers may permit an increase in the regional mobil- ity of funds which may be desirable, if it results in their better regional allocation. (iv) Chambers of Economy 1.93 With the growth of decentralization, self-governing associations of enterprises (Komoras) were established, by branch of industry as early as 1954. Membership in these was made compulsory in 1958. Every enterprise is required to belong to the Chamber of Economy of the republic or autonomous province in wqhich it is situated. In addition there is a Federal Chamber of Economy to which each republic Chamber must belong. A Chamber of Economy has a number of important responsibilities which include examining all types of economic legislation before it is sent to the Federal and republic as- semblies, collecting and analyzing plans of enterprises, preparing estimates of markets, particularly foreign markets, undertaking researchi into new prod- ucts and providing a general economic service for its members. Each Chamber is divided into a number of industrial groups which work together on common problems assisted by professional staff, including economists and engineers. 1.94 The chambers of economy play a major role not only in the formula- tion but also in the implementation of economic policies. For example in the foreign exchange requirements the global exchange quota for importers is allocated among branches of Lndustry and enterprises on the basis of rec- ommendations of the Chamber of Economy of Yugoslavia. These recommendations themselves are arrived at on the basis of discussions with the Republican Chambers of Economy. 1.95 In addition to chambers these are associations of producers of similar commodities, which also play a role in coordinating the decisions of enterprises, and giving technical and marketing assistance to members. (v) Trade Unions 1.96 The trade unions are relatively less important in the Yugoslav eco- nomic system, their major task being viewed is increasing thie effectiveness of workers' self-management. Each enterprise has its own trade union branch and these are organized along industrial lines. Associations of trade unions of different branches exist at the commune and the republic level. The Con- federation of Trade Unions (Sindikat) of Yugoslavia is concerned with the broad lines of development of self-management and plays a role in initiating  - 38 - an6 commenting on draft legislation 1/. An important part of tne functions orf trade unions is to combat tendencies "towards localism and chauvinism" on the part of enterprises and workers' councils. They also fulfill the normal trade union role of "protecting" individual workers from arbitrary decisions of directors and workers' councils. In 1971, the total membership of trade unions was 3.5 million or 91 percent of the total social sector emplovment. However, not all members are enmployed in the social sector 2/. (vi) League of Communists: (LCY) 1.97 With the development of the new economic system the role of the LCY has also changed. The renaming of the party in 1952 was inidicative of thlis change. The role of the party was considered to be not to direct and command through control of the machinery of the state, but to play the leading role, through discussion, education and propaganda, in the devel- opment of the new economic system 3/. However, this was not meant to imply that the importance of the LCY should decline. As the Program of the LCY stated in 1958, because of the existence of "antagonistic forces" which endanger the existence of socialism, "the working class cannot give up the weapor of its class struggle, the dictatorship of the proletariat and tile leading role of the League of Yugoslav Communists" 4/. The process of de- centralization, however, was implemented also within the party organization and the report on the 8th Congress of the LCY (1964) commented that the in- dependence and initiative of the organizations within the LCY had increased so that instead of being "agents for passing on views and executors of tasks assigned" they were becoming participants in "the adoption of conclusions and decisions" 5/. The process of decentralization had its own see-saw evolution. Tihere was a noticeable tightening of party discipline in 1958. A struggle wit1h- in the party in the early 1960's between those in favor of greater self-manage- ment and those for greater centralization resulted in the success of the former. A major reorganization giving gteater independence to republican communist 1/ "The Confederation of Trade Unions of Yugoslavia," Yugoslav Survey, August 1970, pages 34-64. 2/ This is clear from the fact that in 1971, 241,000 persons were employed in agriculture in the social sector. The trade union membership in. agriculture etc. was 358,000. 3! 'The basic principle governing the work of the LCY... is not one of domination, but of stimulation of activities and initiative among the public... in the development of new-type socialist relationships." Program of the League of Yugoslav Communists, Belgrade 195'3, page 245. 4, lbid, page 244. / Practice and Theory of Socialist Development in Xugosiavla, 3elr.;e, 1964, page 312.  - 39 - parties followed the 9th Congress (1970). This was a period of resurgence of nationalist ideas and to some extent these ideas also gained influence in the party. At the Second Conference of the LCY (January 1972) the party geared to combat the more extreme symptoms of nationalist thinking. Since then there has been an increase in the influen'ce on republic parties of the LCY and its Presidium. * 11.98 The LCY is key influence on all facets of Yugoslav life and ba- sicallv determines the direction and pace of development of the system. The total membership of the party was just over a million in 1971 or only about 5 percent of the population, and the membership has not increased very rapidly. In fact in the recent measures for revitalizing the party it is stressed that a smaller, better disciplined and organized LCY would be better able to be the "vanguard" of the country's social development. There is a branch of the party in every enterprise, and members are expected to be ac- tive in influencing decisions and ensuring that they are in line with national policy. The proportion of party members in workers' councils, management board and in other organizations and institutions of self-management is much larger than their share in the population. The influence of the party is seldom ex- ercised directly, and tends to be under-estimated 1/. (vii) The Socialist Alliance of Wlorking People of Yugoslavia (SAWPY) 1.99 The SAWPY was, in the period of centralized planning, known as the People Front and was viewed as a forum through which all citizens ac- cepting generally socialist aims, can participate in the building up of the new system. The SAWPY, with a membership of about 8 million, includes in- dividuals as well as organizations, and is organized at the level of the commune, the republic and the Federation. The role of the SAWPY in economic decisions is not very large. It is more concerned with the political aspects of "socialist democracy" and plays an important role in the election system, determininc election programs, nominating candidates etc. 2/. (viii) Instruments of Economic Policy and Coordination 1.100 The Yugoslav economic system possesses a number of institutions and instruments for formulating interpreting and implementing economic pol- icies. Some of these are familiar tools of economic policy e.g. monetary and fiscal management, social development plans, price and imcome policies etc. There are others which are uniquely Yugoslav, e.g., social agreements and self-management agreements which are a coIIstitutionally-enshrined method for substituting coordination on a self-management basis for the role of the 1/ In a study of self-management in two factories Kolaja, asked 78 workers about the most important influence in the enterprises; 45 thought that it was the workers' council, 27 that it was the Director, 4 that it was the LCY and only 2 that it was the trade union (Kolaja 2p. cit. page 38). Studies bv Rus and Kavic also came to similar conclusions. (Rus. op. cit. page 149). 2/ Yugoslav Life, January 1973.  - 40 - state. These instrument and institutions have had mixed success in ensuring rapid social and economic development and stability and in improving economic efficiency. However, in any evaluation of the Yugoslav institutional and policy framework, the success achieved in combining rapid growth and institu- tional change should not be overlooked. If, to this is added the significant progress achieved in democratizing the socio-economic framework and giving the ordinary worker a high degree of freedom and influence in decision mak- ing, the Yugoslav economic system has to be judged a success 1/. 1/ J. Vanek, The Participatory Economy, and in "Decentralization under Workers' Management' A Theoretical Appraisal" (American Economic Review, Vol. LIX, No. 5, p. 1014, December 1969) goes so far as to conclude that "the labor managed system appears to me to be superior by far, judged on strictly economic criteria, to any other economic system in existence."  - 41 - II. ECONOMIC TRENDS AND DEVELOPMENT ISSUES 1953-72 A. Long-Term Economic Trends Introduction 2.1 The rate of GDP growth in Yugoslavia has averaged about 6 percent per year in real terms during the last two decades. GDP per capita increased about 5 percent per year during the same period. The rate of growth is high compared to average growth rates of developed and developing countries over a similar period 1/, and has resulted in a significant increase in the standard of living and the development of a large modern industrial sector (Table 2.1). Table 2.1: SELECTED INDEXES OF ECONOMtIC AND SOCIAL DEVELOPMENT 1950 1960 1970 Per Capita GDP (1966 prices) 216 333 520 Infant Mlortality (per 100 live births) 118.6 87.7 55.2 Illiteracy Rate (percent of population 10 years and above) 25.4 19.7 15.2 Population per hospital bed 304 199 174 Population per doctor 3360 1474 1010 Radio receivers (per 1,000 persons) 21 78 166 Automobiles (per 1,000 persons) 0.4 2.9 35 Source: Statisticki Godisnjak Jugoslavije. Stages in Postwar Development 2.2 It is evident from the discussion of Chapter I that the economic development of Yugoslavia in the postwar period may be divided into stages in line with the evolution of the institutional framewJork. On the basis of 1/ The GDP of European OECD countries increased at an average rate of 4.8 percent Der year during 1950-70 and that of the developing countries at an average of 4.8 percent per year during 1960-70. (National Accounts of OECD countries 1950-68, and for 1960-70, and UN Yearbook of National Accounts Statistics).  - 42 - evolution of the new economic system it would appear in general to be useful to present long-run economic trends separately for 1952-60, 1960-65 and 1965-70. During 1952-60, though centralized planning had been given up, a large degree of centralized control still existed. The period 1960-65 may be considered as one of transition and struggle between opposing tendencies. Economic Reform of 1965 and its results are the dominating theme of the period 1965-70. The constitutional changes of 1971 increased the autonomy of the republics and may be seen as a logical step in the implementation of the prin- ciples enunciated in the Reform 1/. Growth of Output and Structural Change 2.3 The average sectoral growth rates of GDP (at factor costs) are presented in Table 2.2. These indicate that there has been some slowdown in the growth rate particularly since 1965, though in agriculture and ser- vices the retardation in the growth rate appears during 1960-65. Industry has increased significantly faster throughout the period, and agriculture much more slowly than GDP. Services have increased at about the same rate as GDP , except during 1960-65 when they grew more slowly than total GDP. Table 2.2: SECTORAL GROWTH RATES OF GDP IN 1966 DINARSa 1952-60 1960-65 1965-70 1952-70 GDP 6.7 6.2 4.8 6.0 Agriculture and Forestry 3.5 1.6 1.9 2.5 Industry of which, 10.1 11.0 5.8 8.9 Manufacturing & Mining 12.3 10.7 6.1 10.1 Ccnstruction 4.9 9.5 4.7 6.1 Services 6.8 5.0 5.4 6.1 /a Growth rates are between three-year average data for the periods indic- ated; thus the growth rate for 1952-60 is computed as between the aver- age figures for 1951-53 and 1959-61. Source: Annex Tables 2.1 and 2.2. 1/ Given the relatively large fluctuations in growth rates that charac- terize Yugoslav development in the postwar period, it is necessary in presenting trends to allow for cyclical factors. For example, 1952 was marked by a bad crop, and hence social product was lower than it was in any year during 1948-51. Consequently, if 1952 is used as a base year an upward bias is given to trend growth rates. To eliminate this bias, three-year averages centered on the years marking the begin- ning or the end of different development stages, are used where necessary in the following discussion.  - 43 - 2.4 The differences in sectoral growth rates have implied significant change in the structure of output (Table 2.3 and Chart IV). Because of the price distortions prevailing in the earlv 1950's, when in order to transfer resources into industrial development agrirultuiral prices were administratively set verv low while industrial prices were kept high, the chanpe in the struc- ture of product in current prices is different from that in 1966 prices. Table 2.3: SECTORAL SHARES IN GDP (at Factor Cost) (in percent) Constant, 1966 Prices Current Prices 1951-53 1959-61 1964-66 1969-71 1951-53 1959-61 1964-66 1969-71 Agriculture, For- estry, etc. 37.9 29.8 23.8 20.7 27.2 24.8 23.8 17.6 Industry, of 27.3 35.2 43.0 42.5 44.6 44.9 42.6 41.7 which Manufac- turing & Mining 16.3 24.5 30.2 32.2 35.4 35.4 30.0 29.4 Construction 10.1 8.8 10.3 10.3 7.9 7.6 9.9 12.3 Services 34.8 35.0 33.2 36.8 28.2 30.2 33.6 40.7 GDP 100 100 100 100 100 100 100 100 Source: Annex Tables 2.1 and 2.2.  - 4h - C1aItI '-It ~~~~~~~Char t IV STRUCTURAL CHANGES IN THE GDP 10% 'Current Prices) 000) C .3~~~~0. 426 1 952-53 1 959-6 1 1964-66 1969-71 Agriculture industry Services 100% ((1966 Prices) . a00%n7 -3. 100%3OY 3).,' '33~.... -.... 19525 19359-1 193326 33497 L ij 2 R'"3wa7 3~ ~~ ~~~~~~~~~~~~~~~ol 8ank--751  - 45 - The degree of sectoral price distortions appears from the facts that industry accounted for nearly 45 percent of the GDP in 1952, in current prices, while in 1966 prices which were more in line with international prices, its con- tribution to GDP was only 27 percent. A decline in the share of agriculture in GDP, and a rise in the share of industry (particularly manufacturing), with the share of services roughly constant characterizes the change in the structure of GDP in cosntant prices during the last 20 years. The structural change in current prices, however, took the form of a decline in the share of agriculture, and an increase in the share of services, with the share of in- dustry remaining roughly constant, and even declining. This reflects the differences in price trends for agriculture, industry and services over the last twenty years. Resource Mobilization: Consumption, Savings and Investment 2.5 Both aggregate and private consumption in real terms increased slower than GDP up to 1965, while gross investment grew much more rapidly. (Table 2.4.) Since 1965 there has been a reversal of these trends, partly resulting from the explicit objective of the Economic Reform of 1965 to raise living standards but perhaps also reflecting a tendency of self-managed enterprises to distribute a larger proportion of their net income as person- nal incomes following the increase in their autonomy in 1965. However, slow- down in the growth of gross investment was much more marked than in gross fixed investment. Up to 1965, the growth of gross fixed investment lagged behind gross total investment reflecting more accumulation of stocks. After the Reform following the greater market orientation of production there was reduced investment in stock accumulation. Table 2.4: RESOURCES AND USE: GROWTH RATES IN PERCENT /a (1966 prices) 1952-60 1960-65 1965-70 1952-70 GDP at 1966 Market Prices 6.7 6.2 4.8 6.0 Total Consumption 4.8 4.7 6.3 5.2 Gross Investment 11.6 7.8 4.0 8.4 Gross Fixed Investment 9.7/b 7.5 6.3 8.2/b Exports of Goods and Services 12.5 12.0 8.2 11.1 Imports of Goods and Services 8.4 8.3 11.7 9.8 /a See footnote, Table 2.2 lb The base year is the average for 1952-54. The estimates for 1951 are not available. Source: See Annex Tables 2.3 and 2.4.  - 46 - 2.6 The trends in the share of consumption and investment in GDP vary depending on whether current prices or 1966 prices are used. (Table 2.4) This again reflects the distortions in relative prices that were largest in the early 1950's and were gradually reduced thereafter, in particular, after the Economic Reform of 1965. In current prices the share of private consump- tion in GDP has increased steadily from 1952, while that of total consumption declined in the 1950's and increased in the 1960's. However, in 1966 prices, the share in GDP of both total and private consumption declined until 1965 and thereafter increased (Chart V). The very low share of private consumption (in current prices) in the early 1950's reflects the administra- tively fixed low prices for goods which entered into private consumption (mainly agricultural goods). The impact of relative price policy on the investment ratio was the reverse. The high investment ratio in the 1950's in current prices is significantly reduced in 1966 prices. The increase in private consumption since 1965 appears to have occurred not at the expense of gross fixed investment but of inventory accumulation and a growing balance of payments deficits. The process of institutional change, therefore, does not appear to have reduced the investment "'effort" in Yugoslavia and only in the last few years has there been a rise in the share of private consump- tion. The resource mobilization effort is still very high as shown by the level of gross domestic savings as a percentage of GDP. The decline in the savings ratio that occurred after 1965 was the result of the change in the institutional framework and priorities, and was concentrated in the years immediately succeeding 1/. 1/ See Ch;apter X.  - 47 - Table 2.5: RESOURCES AND USES (as percent of GDP) In Current Prices 1952 1960 1965 1970 GDP 100 100 100 100 Total Consumption 70.0 64.7 67.6 72.1 Private Consumption 36.0 46.6 50.6 53.8 Gross Investment 30.3 35.3 32.3 27.9 Gross Fixed Investment 27.7 28.5 26.0 25.4 Net Exports of Goods and Services -4.6 -4.0 0.7 -5.2 Gross Domestic Saving 22.0 32.8 30.3 26.4 In 1966 Prices 1952 1960 1965 1970 GDP 100 100 100 100 Total donsumption 83.9 73.1 68.2 73.1 Private Consumption 60.4 52.9 50.8 57.0 Gross Investment 21.0 30.1 32.5 31.0 Gross Fixed Investment 20.1 25.1 26.6 28.1 Net Exports of Goods and Services -4.9 -3.3 -0.8 -4.1 Gross Domestic Saving 15.0 27.3 31.6 26.9 Source: Annex Tables 2.3 and 2.4.  TOTAL CONSUMPTION, GROSS DOMESTIC INVESTMENT AND RESOURCE GAP AS PERCENTAGE OF GROSS DOMESTIC PRODUCT (1966 PRICES) 60 CONSUMPTION GROSS DOMESTIC INVESTMENT 40 ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~_RESOURCE GAP 20 4.0% 4.0% 4.6% 1950 1955 1960 1965 1971 VVorld Bank - 6545(2R)  - 49 - Development Strategy and Investment Allocation 2.7 The development strategy has throughout emphasized a fast rate of economic development based on high rates of investment, and rapid industrial development. While there has always been emphasis on industrialization the pattern of industrial development aimed at has changed. During the period of centralized planning, there was relatively greater emphasis on heavy basis industry at the expense of production of consumption goods. There was also an autarkic orientation to development and consequent neglect of the need for the industrial structure to be internationally competitive. There was only a gradual departure from these positions. During 1952-56, the development strategy continued to be that inherited from the period of the First Plan. The period of the Second Plan, 1957-61, modified national priorities and the development strategy, by some increase in the concern for social welfare and living standards. This resulted in an increased share in total invest- ment of noneconomic investments (e.g. housing, health, education etc.) and agriculture, together with a reduction in the share of industry and power. Within industry there was a reduction in the proportion of investment going to basic industries reflecting the emphasis given to expanding the production of finished goods. However, the inward orientation of industrial development persisted. These trends in investment allocation were modified and partially reversed in the 1960's. The increased emphasis on noneconomic investment con- tinued with the increased concern for social welfare. However, the proportion of investment in agriculture declined and that in basic industries increased more or less to the levels of the early 1950's. At the same time, there was a change from the autarkic orientation in the pattern of industrial develop- ment. This did not imply it would appear, a change in the pattern of invest- ment within the industrial sector but mainly an increase in the efficiency of certain industrial branches so that they were able to export. 2.8 The development strategy and its evolution sketched above is re- flected in terms of its implications for investment allocation, in Tables 2.6 and 2.7. The significant increase in the share of noneconomic investments and the decline in the share of mining and manufacturing after 1956, appear clearly. The share of basic industries in industrial investment declined sharply after 1956, but has gradually increased back to its earlier levels. Admittedly, changes in investment allocation may not be the best index for following changes in development strategy. It is interesting, however, how the pattern of investment allocations in Yugoslavia does indicate the shifts in development strategy fairly clearly. The period 1957-60 (when the Five- Year Plan stressed the "extensive" development and increased production of consumer goods) appears distinctly different from both the preceding and succeeding periods. It would support the thesis that the system of planning the "basic proportions" - the volume and sectoral allocation of investment - leaving the allocation within sectors and branches to be determined, was not ineffective in influencing the broad pattern of growth.  50 - Table 2.6: GROSS FIXED INVESTMENT, 1952-69 (1966 prices; in percent) 1952-56 1957-60 1961-65 1966-70 Gross Fixed Investment 100 100 100 100 A. Type /a Economic 77.6 67.1 60.1 63.6 Noneconomic 22.4 32.9 39.9 36.4 B. Sectors Agriculture 11.7 16.4 11.1 9.7 Mining and Manufacturing 36.7 26.7 25.2 23.3 Electric Power 11.6 6.1 6.2 8.2 Transport and Communications 11.6 14.2 10.7 11.3 Others 29.4 36.6 46.8 47.5 /a Economic investments include mainly investments in "productive" sectors; non-economic investments are mainly in housing and social welfare. See Appendix I, Statistical note and Annex Table 2.10. Source: Investicije, 1947-69, Belgrade, 1971. Table 2.7: GROSS FIXED INVESTMENT IN INDUSTRY, 1952-69 (1966 Prices; in percent) 1952-56 1957-60 1961-65 1966-69 Total 100 100 100 100 Power 24.4 20.9 19.9 26.7 Ferrous and nonferrous metals 24.7 10.7 15.7 20.3 Petroleum and Chemicals 10.4 10.8 12.5 13.2 Sub-Total 59.5 42.4 48.1 60.2 Metal Manufactures 7.4 10.0 11.1 7.7 Electrical Equipment 3.2 1.7 3.1 2.5 Food Manufactures 4.3 8.6 5.3 5.1 Textiles 3.4 6.1 7.3 4.3 Others - - - - Source: Investicije, 1947-69, Belgrade, 1971.  - 51 - Investment, Emplovment and Growth Effects of Investment 2.9 The changes in development strategy also had an impact on capital output and capital labor ratios. The fixed assets per worker were fairly stable during the period of "extensive" development, in the social sector but have risen sharply in the second half of the 1960's, after the Economic Reform (Table 2.8.) The trend is marked most clearly in industry and con- struction. At the same time there was a tendency for the capital output ratio which had shown a declining trend until 1965, to increase, particularly in industrv. While the trends in these ratios are not a reliable index of the efficiency of resource allocation in Yugoslavia they do imply a reduc- tion in the employment and growth effects of the development effort. 2.10 This conclusion is supported also if one looks at the increments of employment and output in relation to investment (Table 2.9). For the social sector as a whole the investment cost (in 1966 dinars) per additional job during the latter half of the 1960's was nearly seven times that in the 1950's. The trend was most marked in industry and construction. The iincrease was unusually high because of the exceptionallv slow growtlh of social sector emplovment during 1966-68 when the adjustments necessitated by the EcoTiomic Reform were being carried out. It also reflects the fact that much of the investment in this period was in modernization of existing facilities which did not create much new emplovment. Similarly, thie rise in the incremental capital output ratio (ICOR) in the social sector during the first half of the 1960's reflects, first, the greater share of "non-economic investments" in the 1960's. These investments do not contribute directly to the material pro- duct in terms of which the ICOR in the table is calculated. Secondly, the inefficiencies of the centrally planned period became more evident with the adoption of greater market orientation of production e.g. the emergence of unused capacities in "uneconomic" units. Thirdly, changes in the quality of output and in the product mix, which was closer to the preferences of the population as expressed in market demand, was an obvious increase in "effi- ciency" which should not be ignored. However, the rising ICOR in industry (which accounted for more than hialf the total economic investments in the social sector during 1965-69), did contribute substantially to the rise of the ratio since the Economic Reform. 2.11 While no simplistic conclusions about the trend in the efficiency of the allocation of resources can be drawn from these developments, there are a number of indications that the allocation is sub-optimal and could be substantially improved. The inefficiencies imbedded in the production structure of the pre-Reform period are yet not completely elinminated and biases restulting from the partially freed price struieture co-existing with a liberalized trade and Dayments system, the behaviour Datterns of workers' self-managed enterprises operating in an environment of low price for capital and little risk, and with relatively low nobilitv of capital and labor, have tended to induce distortions in resource allocation 1V. Thus improving the efficiency of resource allocation continues to be an important issue in Yugoslavia. 1/ See Chapters III and IX.  - 52 - Table 2.8: CAPITAL OUTPUT AND CAPITAL LABOR RATIOS 1953 1956 1960 1965 1970 Fixed Assets per tWorker (000 1966 dinars) Social Sector /a 45.0 42.9 44.7 57.3 80.7 Industry 49.2 51.5 54.1 66.8 91.6 Construction 6.5 8.2 7.3 14.5 21.6 Transport and Communications 142.6 144.3 156.7 161.8 185.6 (1966 dinars) Social Sector /b 2.59 2.76 2.27 2,30 2.44 Industry 3.64 3.58 3.02 2.83 3.95 Construction 0.36 0.72 0.45 0.59 0.65 Transport and Communciations 10.09 8.42 6.18 6.04 5.36 /a Fixed assets in 1966 prices in the social sector in the branches producing material product divided by social sector employment in the same branches. /b Fixed assets in 1966 prices in the social sector in the branches producing material product divided by gross material product of the social sector. Source: Stasticki Godisnijak, Jugoslavije.  - 53 - Table 2.9: INCREMENTAL CAPITAL OUTPUT AND CAPITAL LABOR RATIOS /a 1953-59 1960-64 1965-69 Incremental Capital Labor Ratio Social Sector: 65.1 149.0 438.5 Industry 66.0 120.5 552.1 Construction 15.3 139.9 212,7 Transport and Communications 313.5 241.4 781.9 Trade and Catering 39.6 50.4 110.0 Incremental Capital Output Ratio Social Sector: /b 2.43 2.69 2.91 Industry 2.83 2.76 3.37 Construction 1.17 0.72 0.62 Transport and Communications 4.17 7.58 4.82 Trade and Catering 0.56 0.90 1.30 /a The total gross fixed investment in 1966 prices over the period divided by the increment of gross material product in 1966 prices and of employ- ment respectively, between the initial year and the year after the end of the period. Thus ICOR for 1965-69 is the ratio of total fixed in- vestment during 1965-69 and the increment of gross material product between 1965 and 1970. lb Total economic investment in the social sector (i.e., gross fixed investment in sectors contributing directly to gross internal product) divided by the increment of the gross material product over the relevant period. Source: Investicije, 1947-69, Belgrade, 1971 and Statisticki Godisnj_1ak Jugoslavije. Population and Employment 2.12 The population growth rate has been low, averaging less than one percent per year. There are, however, large differentials in the growth rate of the population between the republics. Kosovo, in particular, had a popula- tion growth rate nearly three times the national average. 2.13 The labor force has increased more slowly than total population particularly in the last decade as a result both of declining participation rates and migration of workers abroad. The resident labor force declined  - 54 - between 1961 and 1971. Again, there are significant differentials of growth rates among republics. However, there was no clear relationship between the population growth and labor force in republics. Serbia (proper) among the developed republics and Macedonia among the underdeveloped, had the most rapid growth of the resident labor force, while Kosovo and Croatia had the 'argest proportional decline 1/. 214 The development of the economy is reflected in major shifts in the sectoral distribution of the labor force (Table 2.10). The resident labor force increased by less than half a million since 1953. The labor force in agriculture has declined by over 1.4 million while that in industry has in- creased by nearly 1 million in the same period. The large decline, both absolutely and proportionately, in the agricultural labor force implies sig- nificant success in reducing under-employment in that sector. However, nearly half the labor force is still in agriculture, mostly on peasant farms. It is likely, therefore, that, particularly in the underdeveloped regions, signifi- cant under-employment still exists in agriculture. There was, however, a clhange in the pattern of development in the 1960's, particularly after 1965 with external migration replacing industry and other sectors as the most important source of non-agricultural employment. The increase in nonagricul- tural employment in Yugoslavia during 1965-71 was significantly less than the increase in Yugoslav workers abroad 2/. With the adoption of a strategy of "intensive" development there was a slowdown in the rate of growth of non- agricultural employment. This could not have happened but for the large external migration. Table 2.10: POPULATION AND EIPLOYMENT Growth Rate (Percent) 1953 1961 1971 1953-61 1961-71 Resident Population 16,937 18,549 19,890 1.1 0.7 Resident Labor Force 7,849 8,340 8,298 0.8 -0.1 Agriculture Forestry & Fishing 5,360 4,692 3,923 -1.7 -1.8 Industry & Mining 592 1,128 1,531 8.4 3.1 Trade, Transport and Catering 309 498 760 6.1 4.3 Olther Activities 1,588 2,022 2,070 3.1 0.2 Workers temporarily abroad - 19 578 - 41.0 Source: Stasticki Godisnjak, Jugoslavije. a/ There is some reason to believe that the decline in the labor force in Kosovo is partly the result of a large number of women in peasant agri- culture not reporting themselves as employed. See Chapter III. 2/ 335,000 and 549,000.  - 55 - Labor Productivity and Structural Change 2.15 The combination of rapid growth of output and a fairly slow in- crease in the total labor force implies that increase in labor productivity (output per worker) has been verv significant. In Table 2.11 the total growth of output is broken up into three "components" - (a) the part that can be attributed to growth of the labor force, assuming output per worker was unchanged, (b) the part resulting from increases in productivity of labor, assuming that the sectoral distribution of the labor force was constant 1/, and (c) the part resulting from increased productivitv of labor resulting from shift in the distribution of employment in favor of sectors where output per worker is high, change in the structure of assuming the output per worker in each sector was unchanged. The major part of the growth in outptlt in Yugoslavia has derived from growth in output per worker both in the 1950's and in the 1960's. However, during 1953-61 over 40 percent of the growth in output per worker resulted from shifts in the sectoral distribution of the labor force as compared to only 29 percent in 1961-71. In other words there has been an acceleration in the growth of the "standardized" output per worker with the adoption of the strategy of "intensive" development. Table 2.11: RELATIVE MAGNITUDE OF THIE COMPONENTS TOTAL OUTPUT GROWTH: 1953-71 /a (Percent per year) 1953-71 1953-61 1961-71 Yugoslavia Growth of Net Material Product 7.2 7.6 6.8 Growth of Labor Force 0.2 0.8 -0.2 Growth of Productivity 6.8 6.6 6.9 of which: Growth of standardized output per worker 4.5 3.9 4.9 Growth of output per worker from change in industrial structure 2.3 2.7 2.0 /a Calculated with a sectoral breakdown of employment into industry, agriculture, construction, transport trade and other services. Employment in sectors not contributing directly to net material product was not included. Source: Statisticki Godisnak, Jugoslavije, and Kretanje drustvenog proizoda i narodnog dohtka Jugoslavije, 1952-68, Federal Institute of Statistics, Belgrade, 1969. 1/ This mav be called "standardized" output-per worker.  - 56 - 2.16 There have been large differentials in growth of labor productivity as between sectors, with net material product per worker increasing most rapidly in construction over 1953-71. The growth of productivity in in- dustry and construction has accelerated in the 1960's with greater emphasis on "intensive" development. The growth rate has declined in the 1960's in agriculture, because the shift of labor from agriculture has slowed down. It is also evident that large differentials in output per worker, persist as between agriculture and other activities. Table 2.12: NET MATERIAL PRODUCT PER WORKER 1966 Dinars Growth Rates 1971 1953-71 1953-61 1961-71 Total 14,910 5.3 5.6 5.1 Industry & Mining 28,830 4.4 3.3 5.3 Agriculture & Forestry 6,810 4.1 7.0 3.9 Construction 31,280 5.2 2.4 7.3 Trade & Transport 45,330 4.4 5.0 4.5 Source: Kretanje narodnog dohtka, zaposlenosti i productivnosti rada u privredi Jugoslavije 1947-67, Belgrade, 1970, and Statisticki Godisnjak Jugoslavije. 2.17 The complex relationship between the growth of employment, output and labor productivity is examined in greater detail in Table 2.13 for the industrial sector. There is a distinct change in the inter-relationships of these factors between the 1950's and the 1960's. During 1953-61 there was a strong negative correlation between the growth of output per worker and the growth of employment. Industries experiencing rapid growth of employ- ment tended to have a slow rate of growth of productivity. During the 1960's, however, this was not generally true. This was because industries with rapid increase in output tended also to have rapid growth of both employment and productivity. Thus during, 1961-71, there does not appear to have been a strong trade-off relationship between employment and productivity growth in the industrial sector 1/. The policy implications of this change are in- teresting. During the 1950's rapid growth of an industry in numbers employed in the industry was associated with either rapid increase in employment or in productivity per worker. In the 1960's on the other hand rapid growth of 1/ During 1953-61, the coefficient of rank correlation between productivity and employment growth among 19 industrial branches was -0.667, signifi- cant at the 1 percent level. During 1961-71 the coefficient was -0.128, not significant at the 10 percent level. However, during 1961-71, the rank correlation coefficient between output growth and employment and productivity growth were + 0.639 and + 0.598, respectively, both significant at the 1 percent level.  - 57 - an industry tended to imply relatively rapid growth of both employment and productivity. Thus a rapid rate of growth of industries tended to be asso- ciated with a more rapid increase in industrial employment. Table 2.13: INDUSTRY: GROWTH OF EMPLOYMENT AND PRODUCTIVITY /a 1953-61 -b 1961-71 Output per Output per Output Employment Worker Output Employment Worker Industry, total 955 1RA 117 )AI I ) ' Electric power 297 218 137 303 140 217 Coal and coke 197 125 157 114 75 151 Petroleum 3.5 115 266 520 253 206 Steel 344 147 234 171 138 125 Non-ferrous metals 195 120 162 202 133 152 Non-metallic minerals 270 151 179 286 122 235 Construction materials 224 188 119 228 89 258 Metal products 293 272 108 235 145 162 Electric equipment 588 334 176 314 202 156 Chemicals 4.8 275 149 522 210 248 Wood products 166 109 153 211 114 184 Textiles 235 212 111 204 151 135 Food 248 183 135 234 144 163 Ship-building 162 746 22 2b57 120 239 Paper 315 196 161 327 202 162 Leather 250 183 136 190 152 125 Rubber 312 600 52 277 172 161 Printing 319 288 110 220 144 152 Other 165 366 45 149 87 170 /a Gross material product per worker at 1966 prices. 7W 1961 with 1953 = 100 T7 1971 with 1961 = 100 Source: Stasticki Godisnjak, Jugoslavije. Prices and Incomes 2.18 Inflationary pressures have been a constant problem, and partic- ularly since the 1960's. (Charts VI and VII). The pressures stemmed mainly from the policy of maintaining high rates of investment and growth and also resulted from efforts by enterprises to increase income payments with reference to productivity increase. During the 1950's the pressures for rising prices were suppressed through a wide ranging system of price control and a relatively large degree of control on enterprise autonomy in the distribution of its income. Consequently prices increased relatively slowly as indicated by the GDP deflators and the index of producers prices. (Table 2.14.) There was,  - 58 - however, some increase in the cost of living because of the gradual adjustment of the relative price structure between agricultural and non-agricultural commodities and because of rise in services (including rents) 1/. In the 1960's the inflationary pressures continued and even intensified. With the greater autonomy of enterprises in distribution of their income in 1961 the growth of personal incomes accelerated despite the imposition of mandatory links in 1963 between an enterprise productivity growth and its income payments (Table 2.15). Since the high rates of investment were maintained, the growth of private consumption spurred by rising personal incomes, resulted in severe excess demand. The Economic Reform with its major effort to restructure the price system more in line with international prices and to increase the market orientation of the economy by reducing price controls led to a sharp increase in prices: Price Increase 1965/64 (Percent) Producers Prices: Total 17.4 Industry 14.2 Agriculture 40.1 1/ Between 1952 and 1962 the index of retail prices increased by about 42 percent with the retail prices for industrial goods increasing by 14 percent, for agricultural products by 106 percent and services by 199 percent. Yugoslav Survey, January-March 1966, page 3477.  - 5? - c!;.,rl. 'J' INDUSTRIAL AND AGRICULTURE PRODUCER PRICES, AND COST OF LIVING INDEXES, 1952-71 700 AiGRICULTURE PRODUCER f COST OF UVIN 40 / 500 _o~ 200 =A INDUSTRIAL PRODUCER _