Yugoslavia - The Economy of The Social Republic Macedonia (Vol. 1 of 3) : The Summary and Conclusions

CIRCULATING ;COPY S ouMret ank TO BE RETURNED TO REPORTS DESK The World Ban FOR OFFICIAL USE ONLY FiLE CUPY I-r%Wv%1WV1 A T % wvq ir A"Aull1 X AiLrx-j Report No. 1223-YU THE ECONOMY OF THE SOCIALIST REPUBLIC OF MACEDONIA YUGOSLAVIA (in three volumes) VOLUME I SUMMARY AND CONCLUSIONS June 28, 1976 Europe, Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only In the performance of their officIal titlaes Itcntents may not otherwise be disclosed without World Ban uthorization. CURRENCi EQUIVALENTS * Currency Unit Yugoslav Dinar (Din.) US$1 Din. 18.00 Din. 1 US$0.0555 Din. 1,000 US$55.55 Din. 1,000,000 US$55,555.55 * The Yugoslav Dinar has been floating since July 13, 1973. The currency equivalents given above are as of April 30, 1976. FISCAL YEAR January 1 - December 31 1'e%W f% (V ~CONFIDENTIAL FOROFF jIIAL 'USE ONLI,Y THE ECONOMY OF THE SCTALTIST RKPIRLIC OF MACEDONIA YUGOSLAVIA Table of Contents VOLUME I Page No. BASIC DATA MAPS (2) PREFACE SUMMARY AND CONCLUSIONS A. The Setting ...............................**ti*** *****. B. Socio Economic Cnitos.......* Population ******a*******t*****o**************2*.*. 2 Labor Force and Absorp n - Income Distribution *******i*b*******************5 5 C. T e M cednian Eco oug .................................5 Macro-economic Characteristics .................... 5 Mh1n+aanf Ak11e%rn+.j^n nf' '4nanna n aRoqnn ysuq '7 Social Planning ................................... 8 . Econo c and i .................... Agriculture ....................................... 9 Industy .......................................... 12 Terw a ry.-J& Sectorw ................................... 14 Tertiary Economic Activities ................. 14 :AA%Aca-L1-4 on E ucAio .................................... 1 Health .......................t*************** 16 . Dev lopment Issues ..... ................................ 17 VOLUME II TUE' ECONMrWV OF TPU SCTATIST RRPTTLT.TC OR M ACEOY)TA A. The Set-ing .......................... B. Socio-economic Conditions .............................. 7 ri. MI. U--A-- - JV''aC D. Economic and Socio Economic Sectors..................... 77 E Devel opment Tsu s ............* * ** * ***.*....*.3 TbM TTT APPEIT T1C T and TT ALrx- J=,1JJLj1 L LA %A .L.L ATTPT FM A D TPG This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Ram,k akhn;-on. Page 1 of 2 BASIC DATA /1 SRM/ SFRY SRM SFRY (%) Demographic Features Census growth rate of pop'n; 1961-71 (%) 1.59 1.02 156 Natural growth rate of pop'n; 1972 1.49 0.91 164 Crude birth rate, 1972 2.27 1.83 124 Fertility rate, 1972 2.85 2.34 122 Infant mortality rate, 1972 7.55 4.44 170 Family size, 1971, persons 4.68 3.82 123 Population in agriculture, 1971 (%) 39.6 38.2 104 Population below age 20, 1971 (%) 43.0 36.5 118 Workers abroad/active population, 1971 (%) 7.9 6.6 120 Labor Force Agriculture/total, 1971 (%) 43.9 47.0 93 Working age/total population, 1971 (%) 56.6 58.8 96 Active/working age population, 1971 (%) 67.6 73.6 92 Active/total population, 1971 (%) 38.3 43.3 89 Active/working age, males, 1971 (%) 86.6 87.1 99 Active/working age, females, 1971 (%) 45.2 58.7 77 Employed/working age population, 1971 (%) 29.4 33.7 87 Employed/total population, 1973 (%) 17.7 20.5 86 Unabsorbed labor force, 1971 (% total labor 30-48 /2 force) Income Distribution GMP per capita, 1972 (Din., current prices) 8,154 11,820 69 Pers. income/worker, soc. sector, economic, 1972 (Din., current prices) 24,841 30,028 83 Pers. income/capita, agriculture, 1972 (Din., current prices) 4,296 /2 5,033 /2 85 Pers. income/capita, individual sector agriculture, 1972 (Din.,current prices) 3,681 /2 4,348 /2 85 Pers. income/capita, non-agriculture, 1972 (Din., current prices) 6,695 /2 9,941 /2 67 Macro-economic Features Growth rate GMT, 1972-73 (1966 prices) 8.3 7.6 109 Growth rate GMP per cap., 1952-73 (1966 prices) 6.8 6.5 105 Productivity of labor, soc. sector, 1972 (Din.) 48,327 59,573 81 Investment per capita, soc. sector, 1972 (Din.) 2,487 2,831 88 ICOR, soc. sector, ec.,1960-70 (1966 prices) 2.18 2.58 85 ICLR, soc. sector, ec.,1960-70 (Din. 1,000) 138 195 71 Capital stock per capita, soc. sector, economic 1972 (Din. current prices) 12,528 18,942 66 Capital stock per capita, soc. sector, non- economic, 1972 (Din. current prices) 1,803 2,085 87 Gross profit .rate (accumulation/fixed assets), social sector, economic, 1972 (%) 11.3 13.0 87 /1 The figures for Yugoslavia (SFRY) include Macedonia (SRM). Since SRM's share is in no case negligible in the total, a comparison between Macedonia and "rest of Yugoslavia" would generally show wider discrepancies. /2 Mission estimates. Page 2 of 2 SRM/ SFRY SRM SFRY (%) Intra-Retinnal Discrepancies NMP per cap. richest commune SRM, 1972 (Din.) 10,800 10,500 11 103 NMP pr cAp. nnnrest nmmune SRM- 1972 (Din.) 2-900 10.500 /1 28 Aqricultura Cultivated land/total surface, 1973 (%) 25.9 39.5 66 Arable/agricultural land, 1973 (%) 42.6 50.9 84 Cultivated land/agr. labor force, 1971 (hectare) 2.4 2.6 92 GMP/agr. labor force, 1971 (Din.) 8,536 9)021 95 GMP/cult. land, 1971 (Din./hectare) 3,579 3,507 102 Social sector: share in cultivated land, 1973(%) 20 14 143 Social sector: share in agric.. GMP, 1973 (%) 30 23 130 Industry Share of basic industries in GMP, 1972 (%) 24.4 28.9 84 COR (fixed assets/GMP), 1972 2.29 2.26 101 CLR (fixed assets/worker), 1972 (Din. 1,000) 105 120 88 Gross profit rate (accumulation/fixed assets), 1972 (%) 10.0 13.1 76 Tertiary Sector Labor.force/1,000 inhabitants, 1971 113.7 121.0 94 Fixed assets/capita. 1972 (Din.) 6,754 10,330 65 Active in.handicraft/1,000 inhabitants, 1971 25.0 19.7 127 Active non-ec. services/1.000 inhabitants, 1971 38.7 40.5 96 Construction Housing units completed/1,000 inhabitants, 1973 4.8 6.5 74 Percent private ownership of completed units, 1972 64.7 66.9 97 Transport and Communication Paved roads/1,000 sq. km., 1973 77 97 79 Regular guage railways/1,000 sq. km., 1973 25 40 63 Communication, GMP (Din. per cap.), 1973 55 144 38 Education Illiteracy rate, above age 10, 1971 (%) 18.1 15.1 120 Illiteracy rate, age 10-19, 1971 (%) 4.0 3.1 129 Primary school age attendance ratio, 1972/73 (%) 96 99 97 Secondary school age attendance ratio, 1972/73 (%) 42 39 108 Health Inhabitants per doctor , 1972 2,696 1,471 55 /2 Hospital beds per 1,000 cap. 1972 5.03 5.56 90 Fixed assets in health per capita, 1972 (Din.) 343 419 82 Expenditures of health organizations, per cap. 1972.(Din.) 388 505 77 Infant mortality (per 1,000 live births),1972 75.5 44.4 59 /2 /1 Yugoslav average. /2 Inverse ratio. 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Ала { �'� в�.ои �,� � н 1�r z,l�..,.,� <,. �.. >� ' г�6А,с �� �.1�� г-:4.� 1 �о,,�� �� � � � о а е е с е � т• �r MFY 1972 1BAD 3 PREFACE The report was prepared by an economic mission that visited Mace- douia in April 1975. The mission consisted of Messrs. M. Schrenk (chief), S. Rangachar (economist). G. Weinschenck (consultant) and Mrs. N. El Tatawv (economist) . This regional economic survey is the third of a series planned for all four less developed recrionQ of Macedonia and Montenegro. The regional surveys were initiated with several nhiprfiuac in mi"A Pi ra f- f-l - al-,1A - -4de the Pan', wid, a better under- -_ -- --, _-., k-- LA " V. LL.La L; #_ standing of the state of development and of the specific development problems of region in order to 'Cacil"ate th L . A. D K L U.11ag L. J. L.L.L16 #_ the orientation of future Bank 'enl- strategy. Second, they are intended to convey the Bank's understanding in order ?to promote the on going dialogue about the potential role of the Bank in Yugoslavia. The surveys do not pretend to be an exhaustive evaluation of the development problems, policies and prospects. Statements in the report pertaining to either are intended to suggest hypotheses and to raise questions tor Luther discussion. The report is divided into three volumes: Volume I presents the summary and conclusions, Volume II sets out and analyzes the supporting evi- dence in detail. Volume III contains several appendices on special issues, the statistical annex and annex maps. Since the statements on Volume I rest on the facts and their interpretation presented in Volumes II and III, cross- references are included in Volume I to establish the appropriate links. THE ECONOMY OF THE SOCIALIST REPUBLIC OF MACEDONIA YUGOSLAVIA SUMMARY AND CONCLUSIONS A. THE SETTING Hisqtorical Overview i/ i.M^acedon w.as settfled by Slnavi4 tribes i the- ea1l Middle A ges. Although developing quickly into a center of Slavic-Orthodox culture it remainedwith a brief interlude of poL..tical independence, for centuries the object of controversy between the competing endeavors for overlordship of Its powerful neighbors: ByzanthIum, Bulgaria, and Serbia, until all of them were absorbed into the Ottoman (Turkish) empire during the late 14th century. However, during the five centuries of Ottoman rule Macedonia remained basically Slavic in ethnic and linguistic make up, and orthodox in religious outlook. The Ottoman rule lasted until 1912 when the ethnically Macedonian area was carved up between the Kingdoms of Serbia, Bulgaria and Greece. Only during World War II did a part of ancient Macedonia, the pre- sent Socialist Republic of Macedonia (SRM), gain full autonomy as a member of the Socialist Federal Republic of Yugoslavia (SFRY). Natural Conditions 2/ ii. Macedonia is the most southern Republic of Yugoslavia. To the east it borders Bulgaria, to the south Greece, and to the west Albania. Macedonia is predominantly mountainous, and only about one-quarter of the total surface qualifies for agricultural use. The fertile valleys, particularly in southern Macedonia with dominating mediterranean climate, provide favorable conditions to intensive agriculture if precipitation is sufficient and supported by ir- rigation. Macedonia is a link in the trans-European communication system, connecting Central Europe and the rest of Yugoslavia with Greece and the Eastern mediterranean countries. Political/Institutional Framework 3/ iii. Notwithstanding its own constitution, Macedonia shares most features of its ooliticallinRtitutional framework with the other narrq nf Yuanqlavia_ The three basic socio-political premises are (a) decentralization, i.e. 1/ See Chapter A. 1 of the main report. Throughout this summary reference is#.U -ad to--- A4he co-ep1dn -caters of the main repor (Vlue %I which contain the detailed analyses. 2/ See Chapter A. 2. 3/ See Chapter A. 3. - ii - legislative and political decision making (through the respective assemblies), and administration (through the government organs) on the lowest level of "socio-political communities" (Federation, Republic, commune); (b) self- management, i.e. decision making to the maximum possible degree by those imme- diately affected, that is in most economic and socio-economic matters by the communities of workers of the "basic organizations of associated labor" in economic work organizations or in non-economic "institutions" (for health, education and welfare); and (c) the "delegate principle" of representation through which the members of delegations and assemblies are elected in a multi-stage process from the bottom up. iv. Macedonia's Assembly ("Sobranje") consists of three chambers. The Chamber of Associated Labor is the chamber of general competence; its members are elected from and among delegations of the working people. The Chamber of Communes participates in all matters strongly affecting local interest; its members are delegated by the communes. The Socio-Political Chamber is particu- larly involved in all matters of the socio-political system; its members are elected through nonular vote from a list of candidates nrenared jointly by the League of Communists, the Socialist Alliance, the Syndicates (unions) and the Youth Organi7Ation. The Assemblv dischArcp itsq nnpor through the ExecPtiv Council, whose president is elected upon the proposal of the Presidency of th Renublic by the As.semb1y a A whole And whns other members need be voted upon by the Assembly. The Government is organized in "Secretariates" whose heads ('Secreries) I are elected from the members of the Executive Council. V. "Communities of intereqst ", cps deleg of JV.LUer Qku users of specific services (initially only social services like health, education and welfare, but tO a g-rowing deg-ree also economic services like public utilities, irrigation, transport) are gaining importance. They are responsible for all financial and operational matters and, within teiZ speci- fic area, those for social services participate in legislation and political decisions on equal footing with the assembly (of the Republic or commune). In economic matters the "Chamber of Economy", composed of delegates of all econo- mic enterprises of the Republic, holds a focal position. It arranges for the maximum possible cooperation between enterprises and branches of the economy and plays a decisive role in the preparation of plans for economic development. The "Republic Institute for Planning" provides the analytical background studies for the Five-Year Planning exercise, organizes its carrying out, and reports on Plan implementation; however, according to the principle of "self-manage- meat" it is not a decision-making body nor has it the power to enforce any decisions taken by the Assembly or by the Chamber of Economy and its special- ized branch committee. - iii - B. OCTn-ECONOMTC CONTTTIONS Population 1/ vi. In 1973, Macedonia had 1.7 million inhabitants (about 8 percent of total Yugos lav-ia); about 70 percent reported Macedonian as nationality , another 17 percent Albanian. The demographic momentum of the immediate postwar period has largely subsided, and the census growth rate has averaged at about 1.6 percent after 1961. However, fertility--the most decisive indicator of the demographic dynamics--has stabilized at a level of almost 3 (live births per women during child-bearing age) since the late 1960's, still substantially above the "stable population level" of about 2.1. vii. The demographic evolution in the postwar period was accompanied by large migration flows, between the communes and from rural to urban settlements within Macedonia, between the republics of Yugoslavia, and a large migration abroad. The latter component--mostly young males with a low standard of educational attainment and from rural background, probably in the order of about 20 percent in the age bracket between years 20 and 30--is officially considered as "temporary". But some proportion, particularly of those migrat- ing out of Europe, are likely to stay permanently abroad. The rural/urban transfer, with or without physical movement, reflects the fundamental trans- formation of the society which took place over the last two decades: the share of rural population declined from 61 percent in 1953 to 40 percent in 1971. Viii. The nopulAtion size is likelv to rontinue to grow, due to the large size of the female population in or approaching the prime child-bearing age and to the probable low rate of further deine of fertility. The natural growth rate is likely to remain at about 1.5 percent during the 1970's and to decline thereafter only Slo-0wly1 towards about one percent by the -nd of the- century. Total population, thus, is likely to increase to about 2.4 million My the year 2000. labor Force and Absorption 2/ Lx. Due LU LC are size of eteLnL14. miLrLLL (1.LLLy tU CetrLLLL,:. EUUoPe", the resident labor force of Macedonia remained almost constant over the last decade. The activity rate was persistently and significantly below the Yugoslav average. Two factors can be identified as causing this phenomenon: (a) the age structure with a higher share of the population below the working age, and (b) a lower participation rate in the working age population. That latter factor affects entirely the female population. It reflects the large average family size in Macedonia, the prevalence of traditions in some parts 1/ See Chapter B. 1. 2/ See Chapter B. 2. - iv - of the Republic discouraging a social role of females outside the confines of HeP family, and tHe lack of emnloyment onnortunitiP which discouraged women to actively consider work. x. In comparison with the total labor force (630,000 in 1971), employ- ment in the social sectonr of (27L,000 in 1971) appear still mrnante in size. The rural sector--accounting for 43 percent of the labor force in 1971--has "ar ln/1abo rai-hc ven under most optimistic assumptions o nrae of productivity of land would rise over time, that is releasing further labor force for employment elsewhere. The rest of the individual SeCtor waS Stagnat- ing in labor force absorption and is not likely to provide for much additional absorption in the future. This leaves the social sector as the only pole of local employment which can absorb the existing redundant labor force and any further additions. xi. Registered open unemployment--reported by various sources to be in the range of 4 to 7 percent of the resident active population reported for 1971--does not bring out the dimensions of the discrepancy between the size of the labor force and the capacity to absorb it gainfully within the Republic. The mission made an attempt to assess the various components of open and disguised under- and unemployment and arrived (under various assumptions) at estimates ranging between 30 and 48 percent. As implied by "disguised", not all of it is visible or even actually "unemployment" in the present view of those affected. It rather constitutes a "backlog" in a dynamic perspective. For example, rural under-employment (caused by extremely low land/labor ratio) has only to a limited extent translated as yet into internal migration or temporary migration abroad, low female participation rates are still widely accepted, and so is temporary migration. But in the course of time and in the process of development all the components of "unabsorbed labor force" will surface and translate into the search for local employment providing for an income level compatible with the level achieved in the modern social sector. xii. Tn Addition to this backlog, the working age population and the labor force can be expected to grow substantially, due to demographic forces. The miSSiOnl m-de a"n Attemnt to nssess tliq comnponent of the labor force and absorption problem through the demographic projection model used for the p ation projection. The calculations suggest that the working age popula- tion is likely to continue to grow at higher rates than total population, and that the labor force would grow at higher rates than the working age population. The growth rates of labor force are dropping fairly slowly and will still exceed 2 percent per year through most of the 1980's and may still be in the order of 1.6 percent per year by 2000. As a corollary, the level of annual increments of labor force, will remain at its present plateau of around 17,000 until the end of the century. xiii. Combining the two.components--the present backlog of unabsorbed labor force and the natural increments--shows a problem of challenging pro- portions. Employment would for the next 15 years have to grow by an average of 26-32,000 per year if full employment were to be reached by 1990. However, the average annual employment generation in the social sector came to only - v - around 15,000 per year during 1971-75, and for 1976 to 1980 the target is presently 16,000. Rough estimates from incremental capital/output and canital/ labor ratios indicate that total absorption or even a sizeable increase over and above the Plan target would be unmanageable if it is o be p arhieu tH1r.ugh growth of the social sector and within the present development strategy. This problem of insufficient labor force absorption is clenrly a nmjor, i not the major development, problem of Macedonia. And it is likely to remain the major nroblem fonr anov two decnnAa f-4 1unt gradually the pressure of the demographic dynamics recedes and the backlog is absorbLed by the momentum of economic growth. Income Distribution 1/ xiv. In the comparison between regions, Macedonia had by 1973 reached a per capita %'2 of about 71 percent of the Yugoslav average, a level of disposable per capita household income of 78 percent, and a level of average per worker net income in the social sector of 85 percent. This latter disparity is slightly more narrow than the differences in average productivity. A comparison between socio-economic sectors of the society suggests a pronounced dualism both of income from work per active person, and of household income per capita between the modern (mostly social and urban) sector and the traditional (mostly individual and rural) sector. This dualism can be found within each region of Yugoslavia, whereas the interregional disparities within any given socio-economic sector appear fairly narrow. The lower income per active per- son in individual sector agriculture, in combination with the smaller relative size of the modern sector and the lower activity rates, is at the roots of the income disparity between the regions of Yugoslavia. xv. The income distribution within the social sector is fairly egalitarian; income differences between skill categories appear narrow, both within and between regions. The overall income distribution between recipients classified by income size supports the previous observation on the combined intersectoral! interregional disparities, with the effect that in Macedonia 55 percent of the population receives less than two-thirds of the Yugns1v avera disnncale household income per capita, comparing with a share in total Yugoslavia of only 30 Percent. In addition. major innomp diffPrAncPg hPa,Pn rnmminac within Macedonia (as for any other region of Yugoslavia) can be observed; the spread of average nAr anira GMP harwan the highest and lho im.me 4'onmmmne within the Republic is of the order of 4 to 1. These intercommunal differences - more than one-third of Macedonia's population is living incomunes with a per capita income exceeding the Yugoslav average--is caused by the very same combnedeffet o inersectoral differences and of relative sizes of sectors mentioned above for the interregional income differentials. 1/ See Chanter B. 3. - vi - C. THE MACEDONIAN ECONOMY Macro-Economic Characteristics it xvi. At 1973 prices and exchange rate (Din. 15.6 per U.S. Dollar), the social product (GMP) of Macedonia amounted to $1,135 million. About four-fifths of GHP was accounted for by the social sector and one-fifth by the individual sector, largely in agriculture. The share of industry (manufacturing, mining and quarrying) amounted to almost 36 percent of GMP and that of agriculture to 23 percent. Construction, transport and communications and trade repres- ented another 37 percent of GMP, the remainder being contributed by handicrafts and public utilities. In total Yugoslav GMP, Macedonia represented 5.8 percent, whereas it accounted for 8.1 percent of the total population. It contributed about 5.7 percent to Yugoslavia's industrial output, but 7.3 percent to the agricultural output. xvii. Macedonia has sizeable exports of some agricultural products, most prominently tobacco and livestock. The largest proportion of its exports, however, are in the form of manufactured goods. In addition to its resource based industries, Macedonia has developed a strong export position for some relatively labor-intensive products such as textiles, leather and metal pro- ducts. On the whole, Macedonia contributed a significant share of the coun- try's net exports of consumer goods. xviii. The salient features of Macedonia's growth over the past two decades mav hoe nmmari7Pd in the followine. Between 1952 and 1973, GMP grew. in real terms, at an average annual rate of 8.3 percent, thus surpassing the rate of 7.6 percent realiZed for the ont aa whon1 Due to the higher rate of population growth, the rise of GMP per capita, however, was somewhat dampened to 6.8 percent as compared to A.5 peren for otlYgsAvi. Tho u g *h o- standing among the less developed regions, the real per capita income disparity in Macedonia narrowed Only slwly rom 68 percent of thlat for YUgoslavia in 1952 to 73 percent in 1973. The growth of both social and individual sectors exceeded the Yugoslav average for the entire period but the latter fared comparatively better in Macedonia especially in the early years of its develop- ment. The concentration on social sector activities and especially industry was most evident since the 1960's, and by 1973 the share of industry in GMP had matched that of the country. With this emphasis on the commodity sectors and given the overall scarcity of capital resources, the growth of infrastruc- ture sectors and especially transport and communications lagged somewhat behind the Yugoslav average. xix. The relative gap in Macedonia's state of development is reflected in its labor force indicators. The employment ratio, the ratio of employment basically of the social sector to total population, has successively increased over the past two decades. As compared to total Yugoslavia, however, Macedonia's employment ratio in 1972 still lagged behind by almost a decade, reflecting greater labor redundancy in the rural sector and problems of open and disguised unemployment. Employment grew at uneven rates during the past 1/ See Chapter C. 1. - vii - two decades. The annual increments dropped significantly from an average of about 12,000 workers in the 1950's to almost 4,000 around the mid 1960's, as a result of a relative slowdown in the growth of the economy and.a greater emphasis on relatively more capital-intensive activities. It picked up momen- tum again in the early 1970's in response to conscious policy of stimulating employment and the relative change in the structure of production, especially in the industrial sector, towards more labor-intensive activities. xx. By 1972, employment in economic activities represented 80 percent of the total, of which half was accounted for by industry. As compared to total Yugoslavia, the shares of industry and construction in total employment anroached that of the rointry. Employment in g w cmparatively much higher while employment in infrastructure was somewhat lower. Average orke' t lagged quit significa y behind the Yugoslav average. This was, however, coupled by an almost equal difference in average gross icme s bine average per unit labor cost to a level m to ,,.F A LL"I. A.LJ& V ~~ L=J =L ~.;VLUVL4U.Lt_ L that for the country. xxi. Macedonia experienced a rapid expansion of investment over the past two decades both as a result of high internal accumulation and large transfers from the Federation. In the early 1970's, Macedonia's investment rate--the ratio of realized investment to GMP--came to 33 percent and exceeded the Yugoslav average substantially. The capital stock has also risen almost five times between 1952 and 1970, more than half of the total being in industry. However, fixed assets per worker came to represent 80 percent of the Yugoslav average in 1970 while fixed assets per capita amounted to only 65 percent. Macedonia combined itslabor-intensive path of development with a fairly efficient pattern of capital resource utilization. Starting from a low capital base and small size of the industrial sector, the 1952-60 period witnessed a process of capital deepening especially in industry and consequently a rise in average and incremental capital output ratios. In the 1960's, however, both indicators of capital productivity were lower than in any other region of the country. Capital/labor ratios (both average and incremental), con- sistently well below the Yugoslav average, also demonstrate that the employ- ment generating effect of investment was clearly more favorable in Macedonia. xxii. With respect to contribution to self-financinR of investment, Macedonia reached only two-thirds of the Yugoslav average, but exceeded greatly that of Montenegro and Kosovo, differences reflecting to a large degree the relative size of received Federal Fund credits for economic invest- ment and grants from the Federal hidget for social purnoses. The gross nprnfit- ability of Macedonian enterprise appears to be, on the whole, lower than the Yugoslav average. On a net basis, the deviation was even greater and -as particularly large for industry. There is likely to be no simple explanation f-r this relative lag i rll rofitability in Macdna utosi contributing factors are infant industry problems, lower degree of trans- formation of products and of levels of technical and manageria skill and1 aJJ.G._ LL J 4~LJU.. a U LJ. L A. LLil..J CLLILLUkXL1 JA J kills an technical know-how. Consequently, the Republic is still not capable of gen- erating sufficient savings to finance its investment needs at the given level of distributed personal incomes. - viii - Mobilization and Allocation of Financial Resources 1/ xxiii. Resource mobilization is. in comparison with other macro-economic aggregates, difficult to assess and to interpret. This is mainly attribut- able to the fact that the fiscal and financial aspects of the economy have been the most strongly affected by the continuing process of institutional and rnnntittitonnal chanAq towardsq qrmator "qP1f-manacPment" and decentrali- zation as now embodied in the new Constitution of 1974. The role of the state at a1l levels, as expressed bythebudgets, grauall ctrt t th classic functions of general administration, defense and some (fairly insignificant) subsidies, mostly for social services. The position vacated by the state was assumed in the economic sphere by the enterprises and the banks, and the relative importances of thes t_ o apaenl shifte durA.4Ig 96 to 1971, to some degree from the former to the latter, and back to the enterprises more recently and in accordance with the new COnstitution. In the non-conomic sphere (education, health, social insurance, etc.) self-managed "communities of interest" performed the previous role of the state. In addition, numerous self-managed funds were active in narrowly defined fields each. Few still receive contributions and some continue to collect annuities for previous credits and allocate the collected resources for the initial or for different purposes, but funds are generally being replaced by self-managed communities of interest. xxiv. Savings of Working Organizations account for about one-fourth of the resources mobilized for investments. Their volume is determined by the rules for distribution of realized enterprise income between gross personal income and allocation to funds, as regulated by the social contracts and self- management agreements on income distribution. Bank resources, including for- eign financial credits (excluding suppliers' credits) represent about 40 per- cent. They originate largely from private savings, compulsory deposits of borrowing enterprises, contributions to various funds and some annuities from previous credits from Federal Fund grants and state capital. The third major source is Federal Fund Credits which contribute about one-fourth of investment resources and represent almost 5 percent of Macedonia's GMP. The remainder is made up from various local sources and is largely earmarked for social development or economic development in narrowly defined purposes. No informa- tion was available regarding the volume and role of suppliers' credits, but the scant evidence suggests that they are sizeable. In addition, Macedonia receives grants from the Federation for current expenditures and investment in the non-ennmic pnher, which amount to arnun 24 npercent of its GM. xxv. The planning process in Macedonia, as In Yugoslavia, is essentially an iterative one that involves a complex system of consultations and successive adjustments between numerous participating Lnstitutions, self-managed associa- tions and socio-political organizations, with the Institute for Planning in 1/ See Chapter C. 2. 2/ See Chapter C. 3. - fX - the major coordinating role. The planning process produces a strong consensus among the bodies whi4ch 1ltmately mak the e cinio n mnlpmleetation. The increased emphasis of the new Federal Constitution on "self-management" and decentralization" affects the p e As cm e to th r nt Plan for 1971-75, the forthcoming Social Development Plan for 1976-80 is fore- seen to rest on more rigorous analyses and to entail somewhat greater details. The Plan provisions would also be to the extent possible codified in a legally binding form through "social contracts" (between enterprises and sociopolitical communities and organizations, like the Republic, the syndicate) or through "self management agreements" (between enterprises). xxvi. The Social Plan for 1971-75 broadly addressed the following obje- tives: reducing inter-regional income differentials, increasing the degree of industrialization, improving the employment situation and the standard of living, and raising accumulation and investments. The preliminary information received on Plan implementation indicates an overall ratio of Plan realization of about 82 percent of the GMP and investment growth targets, and an over- fulfillment of the employment growth target (4.5 percent per annum) by about 25 percent. GMP is estimated to have risen by 7.5 percent per annum as compared to the planned rate of 9.2 percent with a shortfall in both industry and agriculture. The shortfall was greatest for basic industries and was accompanied by lower investments than had been envisaged for these activities. On balance, therefore, the growth of light industries, and of investments therein, was higher than anticipated and entailed a rapid growth of employment. xxvii. The Social Development Plan for 1976-80 is currently under prepara- tion but preliminary information was made available to the mission. Globally, it aims at an overall annual growth of 8-9 percent for GMP and of 4.5 percent fre- mlnwment allowi-ng tei ahsorntlon of about 16,000 additional workers annually. Even if realized this rate would be hardly sufficient to absorb the expected natural increase of the labor force- and there wnuld -still remain a large backlog of unemployment and underemploymen. The Plan priorities & *- Up. I --I-. 4, 1~ 4 A ...4f4 F A 4," wifh~~j fLor the indU-Strial sectorL appea to bel-ey-dniid1nacrdnewt national priorities and entail an emphasis on the development of basic indus- tries. Given the more binding nature of the forthcoming Pl the adherence to Plan priorities as presently set out is likely to have repercussions on the realization of thte employmLUent target, 4f there should occur a shortfall in anticipated investment resources. D. ECONOMIC AND SOCIO-ECONOVMIC SECTION1-dr Agriculture 1/ xxviii. In 1973, Agriculture produced 23 percent of Macedonia's GMP, the highest percentage of all regions of Yugoslavia with the exception or vojvodina. The growth rate of Macedonia's agricultural sector of 3.8 percent per year I I See Chapter D. 1I - x - (1966-73) exceeded substantially the Yugoslav average of 2.7 percent. The physical conditions of Macedonia dictate a production structure with extensive livestock (mainly sheep) raising in the mountainous areas and intensive agri- culture in the valleys. The latter accounts for roughly one-quarter of the total surface. The predominantly mediterranean climate provide favorable production conditions, but irregular rainfall during the main growing season is a universal problem for utilizing the potential, unless corrected by irri- gation. Presently irrigation covers 10 percent of the cultivated land, and the conversion of another 5 percent is under .way. xxix. The land use and the output mix reflect the physical conditions. Macedonia's agriculture is to a considerable degree oriented towards vege- tables (particularly early varieties), tobacco and fruit growing (particularly early table grapes and wine), and Macedonia is the only region of Yugoslavia which permits the cultivation of rice and cotton. In livestock, the emphasis is on sheep raising. Conversely, cereals, fodder crops, industrial crops and eattlp rnainc qvp las imnortant thnn P1PiharR in Yugnslavia. Thiq nattern of specialization in accordance with the natural advantages and disadvantages of Macedonia (also reflected in the respective yIelds) has Increased over time and is probably the major reason for the comparatively favorable agricultural growth rates in Macedonia. By 1973, e vth labor and land was about even with the Yugoslav average. xxx. As to marketing, the high degree of specialization of Macedonia's agricultural output mix--implng sizeable deliveri e t hs Yugoslavia and to exports--leads to a comparatively high share of output ULstributed through "organized markets" (i.e. pULLig.1 CLU and LLsLeg U L social sector organizations) rather than through "informal" (peasant) markets. This has created the basis for cooperation between the individual sector and the social sector. The price indices in Yugoslavia for major agricultural output and inputs indicate a sizeable improvement of the terms of trade for Macedonia's main agricultural products. xxxi. The individual sector dominates as in other parts of Yugoslavia, accounting in 1973 for 80 percent of the cultivated area, 70 percent of agricultural GMP, 55 percent of market production, and more than 90 percent of the total agricultural labor force. The specialization between the indi- vidual and the social sectors correspond to the comparative advantages. The individual sector concentrates, to the degree possible by the natural condi- tions, on labor-intensive crops like fruits, vegetables, tobacco and livestock raising. The social sector, with a much higher land/labor ratio and compara- tively easy access to credits for mechanization, has specialized to a large degree on cereals, and on processing and marketing. xxxii. Within the social sector a vigorous process of integration of the kombinats and cooneratives is presently under way. In addition to these producing units, various types of service units have developed. First, the veterinarv sprvice ha nAow aboutf 60 stations novering most parts of Macedonia. In addition to providing common veterinary services, it is actively engaged in the improvement of lIvestock (both cattle n shp) through rnss-brPd1ng - xi - of the low-yielding local races and high--yielding races. Second, since 1971 Macedonia is developing an agricultural extension service particularly aimed at raising productivity in the individual sector. In addition to participat- ing in the lIvestoe upgrAding proram, it nromotes the Intrniiction of new varieties for major crops and the dissemination of modern farming technology through demonstration projects and individual advice, Including support of individual farmers in preparing applications for credits and cooperation aeem-es with social stor 4nterises. And third, Macedonia has several agricultural research institutes specialized-on the major activities within agr icult4u re . Xxxi-il. WitnL Le iectUr, atLUUL U 0pULeUL 1. alL faLms (accoun- ting for 32 percent of all cultivated individually held land) are below the size of 3 hectares. Their viability is crucially dependent on the productivity of land which is generally (in comparison with the social sector) quite low and is estimated to have grown recently by a mere 1-2 percent per year. if the soil and climatic conditions are favorable, if irrigation is available, and if cooperation and marketing arrangements with the social sector assure an efficient technology and high-yield output mix, a sufficient family income can be obtained from farms as small as 2 hectares. On the other hand, if any of these conditions are not met, most of the small farms provide only for a subsistence income. It would either have to be supported by some off-farm income or--if location prevents this shift to a farmer/worker status--will lock the farmers into the rural poverty group. The low land/labor ratio also is at the roots of the rural under-employment. Considerable thought is given to this question and Macedonian estimates of the full employment equivalent range from three-quarters to one-half of the present rural labor force. xxxiv. It is now widely acknowledged in Macedonia that the improvement of productivity of the individual sector can only be accomplished through compre- hensive cooDeration between the individual and social sectors. The indications are persuasive that the social sector in Macedonia has accepted this catalytic fvnct-fion a.q ita majnr rnle for the futtir davelonment of agricultural and of social and economic development in general. Nevertheless, the problem rpmainn that Pvn with mnqt ad1ratad development efforts and under most optimistic assumptions a socially and economically-viable individual sector can only b estabished in conjnrtinn with a higher land/lahor ratio than at present. Consequently, a sizeable proportion of the rural population would have to r-ori4-# 4- econo4ic b-i o4- her anc-444 xxx. eLLL= program for the11 "IeadLL. . D-veloment o.fth Vad/Ais River Basin, presently in the detailed planning stage, would be of crucial importance lor the long-term development of MaUCeUdonia'S agriculure. Although pcved as a multi purpose program, irrigation is a major element. The present program foresees an extension or irrigation within Macedonia by 2.50-3UU,V0 LecA that is 50-60 percent of all cultivated land. No information is presently available that would permit speculationoon the contents, costs and economic returns of the comprehensive and still largely undetermined program. But one of the major--and possibly decisive--indirect benefits would be the effect of the increased productivity of land on the size of the rural population which could remain gainfully employed in agriculture, thus reducing the immense social and economic costs of transferring it to the urban/industrial sector of the society. Forestry 1/ xxxvi. Although about one-third of the surface of Macedonia is classified as covered by "forests", the sector has minimal economic importance. In 1974, forestry accounted for a mere 0.8 percent of GMP, and in constant prices no growth was recorded since the early 1960's. The low contribution of forestry' is the result of centuries of neglect and overuse, due to which most forests are actually unattended brushwood without any commercial value. Consequently, the importance of forestry and of the modest prcgrams for afforestation and-- reforestation are primarily focussing on erosion control, water management and improvement of the micro-climatic conditions. Industry 2/ xxxvii. Macedonia's industry grew between 1952 and 1973 by an average rate nf 13.6 nPrrent, far AxcPding the arowth rate of total Yugoslav indnstrv of 8.3 percent. Macedonia's share in the latter increased from hardly 3 percent in 1952 to 6 percent in 1973, and thp share of inditrv in the economy rearhed 36 percent, about equal to the Yugoslav average. The growth rates exceeded the Yuoslvveag fr almostc every branch, and the industrial growth of Macedonia retained its momentum into the 1970's. xxxviii. In the structure of Macedonia's industry, the "light industries" have a significantly greater wei ght than I _W .L +-1,- i the - YV a ad cularly in comparison with the other less developed regions, although the d-ifference was gradually declining since the early 1960'S. Sinuce "h-eav,y industries" are in Yugoslavia associated with high average and incremental capital-output and capital-labor ("capital-intensity") ratios and-with low accumulation rates, Macedonia's pattern of industrial mix is one of the reasons for its successful industrial and overall development. Macedonia's industry lags significantly behind the Yugoslav average only with respect to the average accumulation rate. Because of its correlation with capital in- tensity, apparent differences in average productivity (output per worker), are largely the effect of the favorable overall industrial structure of Macedonia. Within narrowly defined specific industrial branches the produc- tivity differentials are moderate and about in line with the differences of average gross personal incomes per worker. xxxix. Within basic industries, the energy sector is comparatively small, supplying in 1973 only one-third of the power requirements of Macedonia. However, power consumption has increased at very high rates, and--in compari- son to Yugoslavia as a whole--at much higher rates than GMP. The major reason is the particularly power-intensive industrial structure of Macedonia. While 1/ See Chapter D. 2. 2/ See Chapter D. 3. - xiii - this has been to the advantage of Macedonia as long as power supply in other regions of Yugoslavia was abundant and power rates were low, the opposite situation is likely to emerge in future. For these reasons Macedonia is preparing a large program for expansion of the energy sector, both for thermal power (to be based on open-pit mined lignite) and hydropower (as part of the comprehensive Vardar/Axios River Basin development scheme). The energy develop- ment nrogram has the highest prloritv in the forthcoming F+ve-Year Plan and is likely to require very large investment resources for at least the next deadp. Macedonia will contnuI tn import power unAr -ts lng-term contracts with Serbia and Kosovo. With the social contract made for all Republics and Provinces requiring each to finance its futue power needs, and given its recently discovered lignite deposits and its hydro-power potential, Macedonia plan to meet I ts futu re requi rements baicly-houhdoeti1rout-n Because of the high cost of energy, however, decisions are taken to implement oLy VO ths oe nesve sndustriral pro -Jects- that iedrtrssufficentl IJLLJ.y LLLIJ~ jJIJWi. ALL ~~ . ~LUULLL_L PLUJCt6L~ .11UL Y.U.LU LLUL b i L4 L tl high to cover the associated costs of energy. xl. In ferrous metallurgy Macedonia faces serious problems mostly due to the unbalanced partial capacities within the multi-stage Skopje steel works complex and to technical and managerial starting-up problems. The mission is not in the position to comment upon the ultimate viability of the ferrous- metallurgy complex into which large amounts have already been invested. But it appears evident that without strong efforts for completion--which may require large additional investment outlays--viability is unlikely to be achieved, so that the high priority assigned to ferrous-metallurgy sector is probably well justified. xli. Macedonia has ambitious plans to enlarge its sizeable non-ferrous metallurgy sector. In some instances--where parts of the multi-stage com- plexes are already in existence--the high priority attached to their further balancing expansion is probably well justified. For a number of large proj- ects financing arrangements which involve substantial foreign credits have also already been secured. In view of the high incremental capital-output and capital-labor ratios, the long gestation periods, the low local secondary benefits derived from the local raw material basis, and the high investment requirements (direct and indirect, i.e. including power generation and in- frastructure), the further expansion of basic industries should be closely scrutinized- x1i. The foirth prinrityV Aetor In basic iAlndtrieQ iq the chemical industry. After an impressive start, Macedonia is preparing a program for a large petrochemical complex which would includearefinery. Some of the process stages will be implemented through joint ventures, thus reducing the technological -.ks nd the requiremet for financial mens from 1local sources. It would appear desirable that for the other planned process stages similar arrangements can be found W'thLL parLtL eitheoL oLLtLII e.gLiLoL o g.LULLl Ua. L V or from abroad. xliii. Within the light industries, Macedonia has been very successful in the development of its textile and shoe industry which employed almost one-third - xiv - of total present industrI1 lhnr force. Macedonia was similarly successful in its food/and tobacco industry and in other light industries where employment accounted for another 38 percent of the total. In adtn to t high contribution to generation of growth and employment, these industries were also very successful with respect to accumulation rates which, in the case of food and tobacco processing, surpassed substantially the Yugoslav average. On the other hand, Macedonia had little success so far in developing local engineering industries. The cause is obviously the lack of a basis of know- how and the failure so far to attract know-how from the developed regions of Yugoslavia or from abroad. xliv. As to the strategy for industrial development, it appears that the present favorable structure has emerged partially from a shortfall of intended investment in basic industries, and partially from specific measures taken in concern for the unemployment situation. For the forthcoming Five-Year Plan, the present thinking seems to imply high priority for basic industries. How- ever, it is important to insure that their rapid development would not be achieved through neglect of the growth potential of the light industries. For if the light industries were to assume the adjustment burden in case of an overall shortage of resources, industrial development could turn out less impressive than during the recent past. Tertiary Sector 1/ xlv. The tertiary sector--comprising all activities outside agriculture, forestry, industry and mining--accounted in 1973 for about 40 percent of total GMP and for about one-third of total labor force. The relative size of the tertIary sector is in Macedonia--contrary to the conditions in other less developed regions--close to the Yugoslav average. The same is true for the ati n^4 of 1 a p 4p s tertiary actviies ton Pmployment in primary and secondary activities (social sector), and the evidence suggests that the corresponding incremental -ratio v 1 nell av it. In add4itin to supplying essential goods and services, the tertiary sector is, thus, likely to make a major contribution to resolving the unemployment prObleM. of MacedonI. xlvi. In construction about 38 percent of the output was for residential objects, and about two-thirds of those for private purchasers. However, total residential construction on a per capita basis was substantially below the Yugoslav average which--in conjunction with the high population growth of the past and the large rural/urban migration--points to a severe housing shortage in the growth centers of the Republic. This is not only a matter of social concern, it has--through its effect on labor mobility--repercussions on the process of growth. A stronger promotion of housing construction for private ownership would not only ameliorate these problems, it would also have a positive impact on development because (a) expenditure for private housing translate into a higher local demand (and employment) than for any competing private expenditure category, and (b) it would contribute to 1/ See Chapter D. 4. - xv - conserving the scarce social investment funds for economic investment. Promo- tion of the individual sector within construction, which accounts for a high share of residential construction, would similarly deserve further attention. x1vii. In transport and communication, Macedonia's systems are still deficient in comparison with the developed regions of Yugoslavia. The improvement of the inter-republican systems would ameliorate the physical disadvantage of the distance between Macedonia and the economic center region of Yugoslavia and the sources and destinations of most of foreign trade. Similarly, the imnrovement of the intra-republican systems would tie the poorer, economically stagnating and dnnnnlatiy' arpn r'1noer intn thp main qtrpam of dPvlnnnPnt_ Tt nnpear that the deficiency is particularly severe with respect to tertiary roads which would provide year-round aconnectio to the comunesand settlements. Another problem area is reportedly modernization of the railway system and the iMprovement of its overall operating efficiency. x.iV. e LL LLadiU.L I s Lr J. iL. I.ly heterogenous in that it extends over the whole spectrum ranging from "small-scale industry" (in the social sector) to multi-function (production plus repair plus trading) family businesses, and it extends over a wide range of activities. It seems from the evidence avail- able that a large portion of individual sector handicraft offers traditional goods and services which are being eliminated in the process of development, whereas the modern repair/maintenance and service oriented activities, supple- mentary to development, are insufficiently developed. xlix. Macedonia's tourism sector is still at an early stage of development accounting in 1973 for less than 4 percent of Yugoslavia's tourist beds, less than 3 percent of all tourist nights, and less than one percent of all foreign tourist nights. Further, with the exception of some vacation tourism in the region around Lake Ohrid and the northern mountain range, most tourists are in transit. However, it is assumed that there is a substantial scope for ex- pansion of capacity and for improvement of capacity utilization, and plans are being prepared to triple the capacity by 1990 in the present and in some new localities. Education 1. Great progress was achieved over the last two decades. In particular, the illiteracy rate was reduced from almost 40 percent (of the population above age 10) in the mid-1950's to 18 percent in 1971. The distribution of the re- maining illiteracy by age groups shows its concentration in the older categories, thus pointing to past deficiencies as the root of the problem. 11. In primary schools_ the enrnllment rate approaches in nperrent for the first four grades, but drops to 77 percent for the primary school age popu- latin beyond a 1. A further increase in this uppr ca ---tory faces cosder- able difficulties in the poorer and low population density communes in the mountaineouspart s of 6the RepUlic. On the- other- h-Ad the decliin dp-emor- .L =VU jJCLL L IL ILML V1JL&LJ .L. .11 'JAL -.5 -J E,J - LL-6 phic pressures make any increase of the primary school age population unlikely. Ihe secondary schools almost dOubled enrollment uring the 196's. wever, this rapid expansion was accompanied by two problems. First, the pupil/teacher ratio deteriorated significantly and apparently most severely so in the tech- nical/vocational institutions. And second, much of this expansion took place in general secondary schools ("gymnasiums") which could be expanded-at the least cost per pupil. Only during the most recent years this imbalance was partially corrected through a crash program for vocational and technical institutions. In tertiary education, a phenomenal expansion took place during the 1960's, with enrollment almost quadrupling; most of this expansion took place in Skopje University which in 1973 had an enrollment of almost 30,000 students. lii. There is considerable evidence that Macedonia's education system was more successful to meet the manpower needs of the Republic than most other regions of Yugoslavia. However, due to the limited horizontal mobility (be- tween areas of specialized education) the improving overall balances of re- quirements and availability (by category of educational attainment) may be accompanied by partial imbalances, with continuing shortages in some skill categories and a rapid build-up of surpluses in others. These problems are probably most severe in the highest categories of education. This would imply cons taste of rPnsorcs in aciditinn to the diss%atisfa-tinn of those who fail to find employment opportunities matching their expectations. It seems, t1ierPfnre that the attertion civn to a rloser cordination btween long-term manpower requirement forecast and long-term educational planning is warranted. HTealthu iI4L~~UULLi-I Ui4U _LL~ iJU, ~ ~ 4Ii L. ~ ~ . . 'JL ".LiJA. 1 a LL LL. liii.Macedonia made great progress in the dlevel opment of public health. For example, the numberof medicadoctors per 1,000 inhabitants increased by 40 percent from 1967 to 1975 and infant mortality dropped to one-haLf nce 1953. However, the standard of public health was in 1972 by most statistical indicators still inthe range between 60 and 80 percent of the Yugoslav average. Several factors are responsible for this discrepancy and will also affect future development like the topography whichin many parts of the Republic impedes physical access, insufficient financing capacity of the poor communes to expand and support medical staff and facilities, difficulty of attracting highly trained medical personnel to settle in the rural areas. Concerted efforts are also required to extend complete health insurance coverage to the peasant sector. liv. In addition, promotion of family planning may deserve some further attention. The birth rates have in the average declined drastically over the last two decades, but not uniformly. In many of the poorer and mostly rural communes they are still high, and--as the stabilization of fertility after the middle of the 1960's indicates--a further automatic decline cannot be taken for granted.- It seems that the present level of fertility of 3 (live births per woman during her child-bearing age) is still higher than Macedonia can easily sustain in view of the other long-term development problems. - xvii - E. DEVELOPMENT ISSU I Iv. In addition to the developmentissues raised above, there are some general ones which in the view of the mission will remain relevant for some time. Most of them pertain to the optimal use of the scarce fungible investment resources at the disposal of Macedonia for resolving the two major interdepend- ent development objectives: (a) an accelerated reduction of the income dis- parity between Macedonia and the Yugoslav average, and (b) the absorption of the large under- and unemployment into activities which provide a socially acceptable level of income. Ivi. In this connection three techno-economic coefficients are of crucial importance: (a) low capital-output ratio (average and incremental), i.e. high output generated per unit of investment; (b) low capital-labor ratio ("capital-intensity", average and incremental), i.e. high emploVment generation ner unit of investment; (c) high accumulation rate, i.e. high generation of surplus, available for fumyther inesmt, pe ui o nvsmet In contrast to the other less AevlopeA regions of Yugoslavia, M-An4a has been fairly successful in this respect in its previous course of development. Hoevr aUde drastic shift" In the orientation of development could Jeop- oiwver, a sululn LO L.LL L"AL. L. JL LAIL L . LL1..IJL -L U _J.~L UIL. UU.LU ardize the favorable trends of economic growth and employment generation. It couU, under extreme assumptions, even lead to an extended period of moda economic growth accompanied by rising unemployment. lvii. This possibility is particularly evident in connection with the emphasis given to the development of basic industries which are highly capital- intensive, have very high capital-output ratios, and have--if past experience is a guide--low accumulation rates. While some of the programs are instru- mental for keeping up the momentum of economic development, others may be of high priority for the country as a whole, but may--due to their "enclave type" characteristics--have only a limited impact on the achievement of the major development objectives of Macedonia. There should be no real conflict between the objectives of the country and of Macedonia. If the development of certain basic industries are more essential for the country as a whole than for the Republic, this would imply that a large portion of the benefits accrue to the country. One solution to the apparent conflict would be for the beneficiaries to provide investment resources, additional to those transferred to Macedonia for the purpose of narrowing down the inter-regional income disparity, in the form of credits or joint ventures. To the understanding of the mission the 1/ See Chapter E. - xviii - thinking on the development of "national priorit inus. is wihi th pre-rA- ~fl1lK1lg IL flC CVCLUpUCU Vi.U~L~UU± jLty industries .. w.LALI.Ln L.Lie re paration of the forthcoming Federal Five-Year Plan is already heading in this direction. iviii. Some analytical issues are relevant in this connection. First, the accumulation ratio as used in connection with the income policy (i.e. the distribution of enterprise income between accumulation and workers' income) is important for resource mobilization. However, it can be misguiding if applied as the criterion for resource allocation since it does not link the benefit to the use of the scarce resource necessary for its generation (i.e. the "economic cost"). Second, the increase of productivity of labor, although an important factor, is sometimes overrated if considered in aggregate terms because of the imminent positive technical correlation with capital-intensity. This limits the usefulness of aggregate productivity considerations in con- nection with allocation decisions. Third, in Macedonia, as in the other less developed regions of Yugoslavia, the per unit labor costs tend to be higher and the costs of credits (if obtained from Federal Fund resources) tend to be lower than in the developed regions of Yugoslavia. As a result, in the micro/financial analyses capital-intensive activities and processes appear more favorable in relation to labor-intensive ones than warranted by relative scarcities. The rational allocation of scarce resources would require a re-qfu1 eviaitinn nf the real costs and hnefits connected with alternative investment opportunities. The importance of sound project preparation and app a l uA therr be ph14hghlited 1/ li. Macedoia,-a 1 l i.n development exposed to te compti- tion of more mature economies or regions--suffers from the disadvantage with respect to accumulated technological know-how. This is probably another reason for the emphasis on the development of basic industries, for which this dis- advantage is less severe and more easily surmountable. However, for achieving in the long-run a balanced economic structure including high-technology activ- ities and involving a higher degree of processing and fabrication, efforts need to be made to telescope the costly "learning period" by attracting tech- nological know-how through joint-ventures with established enterprises. While elaborate incentive policies have been devised (and been implemented with considerable success) for joint-ventures with foreign enterprises, little com- parable joint-venture type cooperation has developed as yet with established Yugoslav enterprises from the developed parts of the country. In this area there is obviously the need to design an incentive policy package which would initiate the voluntary transfer of know-how and activities to the less devel- oped regions. It would, by necessity, have to be a country-wide policy, and would have to aim at establishing an inter-regional division of labor to the benefit of all regions. lx. The capacitv of the social sector for employment generation is, given the limitation of social resources for industrial development, obviously 1/ -' See paragraph lxiii. - xix - .L&uLicient to ausorb the unuer- and unemployment w.LLIIn a reasonably sho period of time. But with the exception of agriculture, which has received considerable attention in recent years, the acknowledged need for a subsidiary development of the individual sector has not yet translated into effective promotional policies. There is a wide range of activities--specifically in construction, handicrafts and tourism--which are not affected very much by economies of scale, and where small producing units have the comparative ad- vantage of greater flexibility. In many instances the capital-intensity of small individual producing units would probably be fairly low and, in addition, a sizeable portion of the required investment resources would be provided from private savings rather than drawn from the scarce social investment resources. A special case in this connection is the reintegration of temporary migrants who have acquired the skills and the savings for initiating an independent productive activity. In all sectors, including individual agriculture, new forms of cooperation among individual producers and between groups of producers and social sector enterprises are presently being discussed which--once trans- lated into promotional policies--could spur the development of the individual sector where it has a legitimate function within the socio-political framework of Yugoslavia. lxi. Investment resources are a critical bottleneck for development. While many components are bevond the reach of nolicv measures of the Republic- two components can be effected. First, the accumulation rate of the economy cne e throgh the i policy. However, this could3 nly b achieved by reducing the growth of average personal incomes below the growth of enterprise income. a 4 intrrelation pon o a pnful, nol4y 41n-n which all less developed regions of Yugoslavia are facing. It would entail in- the shr ru a1 widnin of th ine-regi- onal inom ga fo tha segment-49 .L&L.J LLL= OLIVL6I LULL a WJ.U=L.LL6 VJ. LL= .LL1LL L =r,J.I.L L rGLDLU O.jJ.J LLx&L. 0=6m,U L of society already integrated into the social sector, but in the long run a more rapid growth of the economy and of personal ILILCOmCS, and a UeL Lai social and economic integration of the poorer segments of society through more rapid employment generation from increased investment. 1xii. Another problem of resource mobilization is the possible incidence of negative real rates of interest on private savings. Negative real interest rates may induce private savers to convert the free margin of personal income into luxury goods and services. Four---factors are. relevant. in this- connection. First, rates of inflation have receded drastically since the middle of 1975, largely alleviating the effects of negative real rates of interest. Second, the all-purpose banks are essentially controlled by the borrowers who are primarily concerned with low interest rates on credits- Third,'the view-fs widely-held--althoight6 the knowledge of the mission unsupported by empirical evidence--that the volume of private savings is inelastic to interest rates. And fourth, the rejection of the incidence of income unearned by work is frequently linked to noQitive nominal rates of -interest-, notwithatanding-the fact-that negative real rates -of interest result in transfer of unearned income from depositors to borrowers. Further, new legislation pertinent to resource mobilization and allocation is still pendIng. To the understandIng of the mission the laws on banking and on - xx - associated labor--which are currently under preparation--would contain provisions on the mobilaLi4LnUL1 adLLU JJULngr . iLVLeLeL LesurCeS. 1xiii. According to the socio-political premises of Yugoslavia, allocation decisions are not left to an abstract market mechanism but are to be made by conscious choice of the direct producers of the investible surplus. Project analysis, thus, is crucial for attaining a rational overall pattern of alloca- tion. Elaborate methods of micro-economic and financial evaluation have been devised for this purpose. However, the high actual labor cost and the incidence of subsidies in preferential credits do not appropriately reflect the relative factor scarcity for the economy and the society as a whole. Therefore, there is a need for supplementing the micro/financial analyses by some form of economic (or social) benefit/cost analysis. It would improve the rationality of choice between alternative projects, and if priority among alternatives has been assigned--would demonstrate the economic costs of the chosen ones in terms of benefits foregone through the preemption of financial resources from alternative uses. An economic benefit/cost analysis could also contribute to making a more rational choice among the competing claims for lnw-interest credits (from Federal Fund resournes) containing a large grant (subsidy) element for the recipient enterprises, which is ultimately passed through to workers incomes.