Yugoslavia - The economy (Vol. 1 of 3) : Main report

IRETUJRN- TO CIRCULATING UY REPORTS , r t N 0. EA-84 TO BE RETURNED TO ARCHIVES IV6i1u"A WITHIN ONE WEEK This report was prepared for use within the Bank. In making it available to- others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE ECONOMY OF YUGOSLAVIA May 1, 1958 Department of Operations Europe, Africa and Australasia  CURRENCY EQUIVALENTS Official Rate: $1.00 = 300 dinars Settlement Rate $1.00 - 632 dinars I dinar = $0.001582 1 million dinars - $1,582 1 billion dinars = $1,582,000  SMOIARY 1. Yugoslavia's economic system is unique, new and rapidly changing. Innediately after the war, the economy was organized on the highly con- trolled Soviet model. After the break with the Cominform in 1948, more flexible relationships were gradually introduced. Local authorities acquired important functions, markets were reinstituted and the economic enterprises regained their autonomy of management, collective farms were nostly disbanded, the cooperative movement was reorganized on a voluntary basis and forced farm deliveries at fixed prices to a state agency were given up. This process is still going on but at the same time, an active campaign is being pursued to strengthen the socialist relations in the econoimry: workers' managenment is fostered, the cooperative movement is promoted. The government retains strong controls over the economy: in the field of savings, investment, prices, international trade, etc. 2. Industrial production has increased by more than 10% per annum, except during tho crisis years following th'e break with the Cominform. Industry now con ributes almost twice as much to total output as agricul- ture which, befcr.e the war, was by far the most important economic sector. This development has been aided by the presence of good raw material re- sources and. a good energy potential. Agricultural output stagnated until 1957 when, for the first time, the prewar levels were appreciably surpassed. During the last five years, consumption has increased, heavy industry has received less priority and agriculture has gotten better treatment. 3. Over-populationi on the land remains one of Yugoslavia's crucial prob- lems and is expected to be so for a long time. However, industrializat:ion has more than absorbed the ecquivalent of the whole of the increase in workiing force since the end of the war. Scarcity of skilled people atid possibly insufficient labor mobility may hamper industrialization in some regions and economic sectors. 4. The banking system is very new. Money supply has expanded rapidly from banL- credit for inventory financing, increased consumer credit and som,e government deficit financing. Pew regulations on the financing of working capital requirements should give the central bank more control over the money supply; new consumer credit and deficit financing are ex- pected to decline. 5. The price mechanism works imperfectly. The price structure is still burdened by important distortions: many basic consumer goods and services are kept at low levels; maximum price ceilings cover some 20% of all indus- trial products, competition from abroad is screened by a system of exchange coefficients. These distortions are supposed to be gradually eliminated. The impact of this leveling upward appears to give the prospects for price stability little chance. 6. The country has experienced heavy deficits on her balance on current account mainly because of the shortage in her domestic food production. HowTever, foreign help, mostly from the West, has filled the gap and recently has permitted a small increase in the exchange reserves, a reduction of the debit position in payments agreements' accounts and the building up of  - ii - inventories to adequate levels. Both exports and imports have grown rapidly in recent years, chiefly because of resumption of trade with Eastern Europe in 1954. cemi-finished and manufactured products are becoming more important exports. 7. The prospects for economic ievelopment, as outlined in the current five-year plar, 1957-1961, are good; the economy now appears to have the basic foundation of utili-ties and industries that makes future growth eas- ier. Gross national product is to grow at a rate of around 9% per annum or around 7% per capita. Personal consumption is to expand by 6.5% - by more during the first years of the plan - while at the same time half of the increased income between 1956 and 1961 is to be saved. Investment is to be maintained at well over 30% of gross material product; a larger portion of it being devoted to agriculture, whose output it is hoped will expand by around 7% per an.num. By 1961, the balance on current account, excluding imports financed by loans, is to be in equilibrium. Foreign financing to cover the expected deficits during the rest of the plan period has for the most part already been secured. By 1961, improved agricultural production should make the country independerrt in her food supply. .4mbitious as they are, there is a good chance that the goals set by the plan may be realized in 1961 or shortly thereafter. An important drawback of the plan is the continued shortage of exchange reserves, which by the end of the period are to reach 6100 million, including some commodity reserves, or only 15% of imports. 8. The contracted public debt amounts to $874 million, roughly divided between the Soviet bloc and the West. Eighty percent of the debt to Lastern Europe, which includes $175 million for an aluminum plant and to be re-,id in aluminum deliveries, is not disbursed. In 1956, the service - all 'a Western currencies - amounted to ,'48.5 million and absorbed 19.5% of export earnings outside the Soviet bloc. By 1961, the service in Eastern European currencies shotud be under 12 of exports plus net invisible receipts from the Soviet bloc. In Western currencies, the service on present postwar debt should be under 10% of Yugoslavia's export and net invisible receipts in non- Eastern European currencies. This wculd leave a margin of around $10 million for additional service in Western currencies on prewar and new debt, assuming that a service burden in Western currencies of 12% of total export and net invisible earnings outside Eastern %urope would not be excessive. After 1961, this margin is expected to increase rapidly. 9. Before 1961, Yugoslavia should be able to start small payments on her prewar debt - this would be easier to the extent she can secure capital im- ports above those needed to fulfill the plan. An early settlement on the prewar debt might be to the economic advantage of Yugoslavia since it would allow her to start negotiations on prospective loans in order to try to secure a steady capital inflow in the later years of the plan, and especially after 1961. 10. The Yugoslav economy is particularly vulnerable to external political factors. The foregoing analysis and conclusions are based on the assumption that the external political situation does not deteriorate so drastically that it disrupts her present external economic and financial relations.  TABLE OF CONTENTS Page No. BASIC DATA I. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . 1 The Geographical Setiing .1 Historical Bacl:ground . . a . . . . a . . . . . 1 Population and Employment . . . . . . . . . . . . . . . . 3 Recent Fconomic Growth . . . ... . . . . . . . ..... . 3 II. INSTITUTIONAL OPGAYNIZATION ... . . . . . . . . . . . . 5 Goverrment . . . . . . . . . . . . . . . . 5 Economic Enterprises and the Orgarization of Production. 5 Banking System.. . . . . .7 Foreign Exchange and Trading System . . . . . . . . . . . 8 III. STRUCTUE OF THE ECONOMY . . . . . . . . . . . . . . 10 National Accounts . . . . . . . . . . . . . . . . . . . . 10 Agriculture . . . . . . 10 Industry and Mining . . . . . . . . . . 12 Basic Services . . . . . . . . . . . . . . . . . . . . . . 12 Public Finance . . . . . . . . . . . . . . . . . . . . . . 13 Money Supply . . . . . . . . . . ... 14 Prices . . ........ . . . ..... . . . 15 Foreign Trade . . . . . . . . . . . . . . . . . . . . . i5 Balance of Payments . . . . . . . 16 IV. ECOYOYiICPM.OSPECTS . . . . . . . . 18 The Five-Year Plan 1957-1S61 . . . . . . . . . . . . . . . 18 General Policies ... 19 Sector Goals... . . 19 Balance of Payments .. .20 Appraisal of Plan Goals . . . . . . . . . . . . ... . . . 21 V. EXTEPDTAL DEBT . . . . . . . . . . . . . . . . . . . . ' 23 Prewar Debt . . . . . . . . . . . . . . . . . . . . . . . 23 Post-Wmr Debt .. 24 Service on Postwar Debt ................. . 26  CHARTS Crops: Output; Yield Per Hectare Livestock Industrial Production Balance of Payments on Current iccount Sur,ply and Use of Resources Total External Trade; External Trade by Principal Comm,odity Groups; External Trade by Principal Trading Partners Service on Post-War Debt Outstanding as of December 31, 1957; Debt Service Patios MAPS Political Map Railway System Electric Power System Poad System ANIEX I - The External Public Debt of Yugoslavia ANM'EX II - Statistical Tables  YUGOSLAVIA Basic Data Area: 257,000 square kilometers. Population: l million Yearly rate of increase: 1 Population in agriculture: 58% Gross National Product, 1957: Total - Est. 2,200 billion dinars 32j billion equivalent (at 632 dinars $1) Peal Growth Rate, 1947-57: 6% per annum Per Capita - -200 equivalent Real Growth Pate, 1947-57: 4'2% per annum Percentage of Estimated Gross National Product, 1957: Gross Invesc,ment 29% Exports of Goods and Services 7% Public Current Expenditures 14% (Defense 8%) Geographical Differences in Per Capita Income. 1956 (at 632 dinars = $1) Yugoslavia $200 Slovenia $400 Bosnia-Herzogovina $160 Croatia $240 Macedonia $140 !erbia $170 Montenegro t'2C Balance of Payments, 1957 (In millions of dollars) Exports 415 Imports -661 Net Invisibles 92 Total Debt Service -49 Net -203 Financing Loans, credits, official donations 171 Reparations, etc. 49 -*220 Net Improvement in Foreign Exchange Position + 17 Foreign Exchange Reserves (December 1957): $40 million External Debt Prewar - Principal Amount in Default - $51-510 million equivalent Postwar - Contracted - t874 million equivalent Disbursed - $299 million equivalent  YUGOSLAVIA CROPS OUTPUT YIELD PER HECTARE (MILLIONS OF METRIC TONS) (QUINTALS) 10 TOTAL CEREALS TOTAL CEREALS 20 8 I10 6~~~~~~~~~~~~~ 30 4 WHA 20 2 050SX 10~~~~~~~~~~~~~~~~~1 0 -2 * ~~~~~ON300 2 200 0 7 ~~~~EETS ~ ~ ~ ~ ~ ~~~UA 0ET X'30- 39 '47 -5 1 '47 '48 '49 '50 '5 I '52 '5 3 '54 '55 '56 '57 '47 '48 '49 '50 '5SI '52 '53 '54 '55 '56 '57 AVERAGES (Est.) (Est.) L IVESTOCK (MILLIONS) 025 5 2 I I.. ... ....j... II..~. 1947 1949 1951 1953 1955 1957 1947 1949 1951 1953 1955 1957 BEGINNI NG OF PERIOD 2/28/5R 1359A(A) IBRD- Economic Staff  YUGOSLAVIA INDUSTRIAL PRODUCTION 6 I ~~~~~~~~~~~~~~20 ELECTRIC POWER COAL F 4(Billions of KWH) ___~_ (Millions of tons) 0~1 5 2 10 O 5 COPPER ORE BLISTER COPPER (Thousands of tons) .5(Millions of tons) _______ ____ 4 1.0 30 .5 20 2.0 1~~~~~~~~~~~~~~~~~~~~~~~.0 LEAD-ZINC ORE BAUXITE (Millions of tons) /000 ..5 1.0 .5 2.0 i, , l f 1000 IRON ORE 001 STEEL[I, (Millions of tons) (Thousands of tons) 1.0 500 0 1000 -------- 2.0 TRANSFORMERS CEMENT (Millions of tons) (Thousands of KVA) 1.5 500 /00 ~ ~ ~ ~ ~ ~ _____ __1.0 0 i t .5 0 3 PLY WOOD 30 (Thousands- of M3) 2 e 20 L SAWN WOOD (Millions of M3) n.a. n.. 2 0 I . . L* _ _ _ _ 25 ,i 250 SHOES (Millions of pairs) COTTON FABRICS (Millions of M2) 20 (Leather and rubber) 200 1 5 150 10 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ __100 5_ 50 1939 '46 '48 '50 '52 '54 '56 *'58 1939 '46 '48 '50 '52 '54 '56 *'58 *Annual rate based on 10 months data 2/28/58 1360 IBRD - Economic Stoff  YUGOSLAVIA BALANCE OF PAYMENTS ON CURRENT ACCOUNT (MILLIONS OF U.S. DOLLARS) 0 100 200 300 400 500 600 EXPORTS l 1938 NET INVISIBLES RECE IPTS PAYMENTS 1947 RECEIPTS PAYMENTS 1948 RECEIPTS PAYMENTS 1949 RECEIPTS PAYMENTS 1950 RECEIPTS PAYMENTS 1951 RECEIPTS PAYMENTS 1952 RECEIPTS PAYMENTS 1953 RECEIPTS PAYMENTS '954 RECEI PTS PAY ME NTS "955 RECEIPTS FE1F~~ PAYMENTS 1956 RECEIPTS PAYMENTS RECEIPTS PAYMENTS 2/28/58 1362 (R) I BRD - Economic Staff  I. BACKGROUND The Geographical Setting 1. Yugoslavia is about as large as the United Kingdom or Western Germany. Poughly, the country can be divided into three main regions: (1) the north- east, the granary of Yugoslavia; (2) a narrow coastal strip along the Adriatic Sea; and (3) the remaining mountainous two-thirds of the country. 2. Three climatic zones meet in the courtry - the Mediterranean climate, with rainfall in winter, penetrating into the mountains from the Adriatic and Aegean Teas and giving the country an important winter hydro-power potential; the Atlantic climate, with rain fairly evenly distributed over most of the year; and the Eastern European climate with heavy rains in spring often leading to floods in the fertile Danube basin and making in- vestment in drainage and reclamation a necessity. The latter two climates dispute most of the country. Historical BEck=und 3. The basic cultural, national and economic differences which are still quite strong among the present Lugoslav peoples were ingrained during the many centuries when the Turkish Empire and WJestern Europe disputed their lands. Upon the formation of Yugoslavia in 1918, Slovenia had considerable industry in Ljubljana and a fairly acvanced agriculture; Croatia had feudal remnants in agriculture with some industry around Zagreb; Cerbia was a peasant state producing for the market with practically no in- dustry. The rest of the peoples were peasants, mostly on a subsistence basis, with a few isolated rining settlements. Inter-War Period 4. Between World Wars I and It, Yugoslavia remained an under-developed area. Tooether, manufacturing and mining absorbed about 6% of the gainfully employed - i.e. a degree of industrialization below that of Colombia at the present, time. Seventy-five percent of the population was still directly dependent on agriculture in 1939. 5. While the growth of industry helped reduce the proportion of the population on the land between the two world wars, in absolute numbers the agricultural population rose from 9X million to around 11* million. It has been estimated that, in 1938, 5 million people or about 40% of the total population on the land were "surplus". This was a greater p-ropor- tion than in any of the other Balkan countries. 6. The countryts economic character was reflected in her exports: mostly unprocessed acricultural products, timber and ores.  -2- After World W.!ar II 7. By the end of World War II, the leaders of the Partisan movement had secured control of the entire country. They organized a Communist-dominated government that acted rapidly to remake the countryts institutions in the image of the Soviet Union. Industry, mining and commerce were nationalized and a campaign begun to establish collective farms. -he economy was organ- ized on the basis of detailed centralized direction. Output goals, the supply of raw; materials, sales for each enterprise ware determined by the central government. As soon as the war damage had been largely made good with around $500 million of UTTRR& help, the country embarked on a Soviet- style five-year plan for the years 1947-51. 8. First priority was given to investment, par icularly in heavy industry. Some success was achlieved in raising industrial wtput. Agriculture, however, retrogressed. The small investiient in agricultuwe was mostly in communal halls and the like, which were favored in order ,o promote collective farms. Even with the great intensity of forced saving, it was impossible to finance internally aid the investment undertaken. Capiial was secured from abroad in the form of short-term credits from Eastern rurope, reparation payments from Hungary and the remainder of aid from TJR5a. 9. In 1948 came the break with the Cominf crc countries. Trade with the TJSSTt and its satellites, which had accounted fhr half of Yugoslavia's trade in 1947, stopped completely. Investment projcts dependent on equipment imports from Eastern Europe could not be ccapeted and new markets for exports and new sources of imports had to be 'ound. Political tension led to a sharp rise in defense expenditures tvtil they absorbed one-sixth of national income. The supply of raw mater'-ls fell short. The index of industrial production (1939=100) fell from 1'? in 1950 to 164 in 1952. In addition, agriculture sufferled severe lossesfrom droughts in 1950 and 1952 - made more severe by the passive res-istanceof the peasants to the continued forced deliveries of produce at low fixed prices. Living standards declined. Severe food shcrtages and a fu~rther declineiLn industrial production were averted only by grant aid from the United 3;ates, United Kingdom and France and foreign loans. 10. From 1950, and especially since 1952 the old system of detailed central planning has been progressively re.laced by freer economic rela- tionships based on the individual enterprle acting as an autonomous economic unit. Agriculture has been trea'cd better, heavy industry has lost its top priority and the claims of c)nsumers have begun to be resnected. The stage reached in this evdution will be analyzed in later sections.  - 3- Population and Employment 11. Since the war, population has increased by almost 3 million and is now around 18 million. It is growing by almost 300,000 a year or a rate of about 1-71% yearly which is likely to continue for some years. The birth rate now is about the same as in Southern Italy or the United States, around 25 per 1,000, while the death rate is somewhat higher at around 11 per 1,000. 12. The working population has been increasing during the last few years by approximately 140,000 persons per annum. This number is expected to drop somewhat in the next few years reflecting the low birth rate during the last war and immediately afterwards. Emigration of about 10,000 people occurred in 1957 and further emigration may continue, although there are formidable political obstacles to it both in Yugoslavia and in the recipient countries. 13. The current economic plans foresee new jobs outside agriculture over the next four years of around 140,000 a year, or more than the ctlrrent natural increase in the labor force. No general shortage of labor is likely to develop, however. Heavy over-employment in agriculture and to some extent in industry provides a large reservoir of labor, and there is 4n addition unemployment amounting to about 5% of the non-agricultural labor force. 14. Temporary labor shortages may, however, develop in the more indu3- trialized regions of the country - for example, in Slovenia, whose working force is not growing, and there will be a continuing need for labor mobility between agriculture and industry, between different parts of the country and between enterprises. 15. Managers, engineers and accountants are thinly spread throughout the whole economy; highly skilled workers are in short suDply. The government has initiated a vast educatiDnal program to train qualified people. The number of students at universities and higher schools jumped from 18,000 in 1938/39 to 70,000 in 1955/56, with the greatest increases in the technological branches. However impressive, these advances have not been adequate. Recent Econormc Growth 16. In the last five years, the economy has grown rapidly. By 1953, total output had regained its previous high level of 1949. Since then, through 1957, net material product In constant prices increased by around 40%. ("iaterial product" differs from the usual "national product" by excluding the contribution of most services. Tn Yugoslavia, "material product" is estimated to run about 15% below a corresponding "national product" estimate. Because of the still existing substantial price dis- tortions between sectors, the national accounts figures have to be inter- preted with even more than the usual caution.) 17. This increase was due to a number of factors: the government con- centrated on the most important projects (the "key projects") begun earlier and with the help of two IBRD loans, completed them; there was a more adequate  - 4 - supply of raw materials; Yugoslavia continued to receive large grants from the West (totaling over $700 million in 1950-1957) and at the end of the period some loans from Eastern Europe; investment rermained high at more than 30% of gross material product and with the progressive freeing of the econony went increasingly into more productive investment; the strengthen- ing of market forces also made the utilization of existing capital more efficient and encouraged greater effort on the part of the peasants; and military plants were converted to civilian production. 18. The production gains since 1952 present a more balanced picture than previovrsly with output of consumer goods, for the first time, increasing as rapidly as production of investment goods. 19. In addition, the increase in expenditures on the "social standard" helped the consumer through better and more adequate health services, a safer supply of drinking water, etc. The noteworthy improvement in the quality of consurer goods, which followed the introduction of free markets, constituted another real benefit. 20. In this growth, agriculture and forestry have lagged. It was not until 1957 that a large increase in agricultural output was shown and 1938 levels were appreciably surpassed. The recent bumper crop is attributable to excellent weather and also, to some degree, to the n-Dre favorab'e poli- cies towards agriculture.  - 5 - II. INSTITUTIONAL ORGANIZATION Government 21. Yugoslavia is a federation of six republics (see accompanying politi- cal map). The republics are important as a means through which the viewpoint of the various regional interests gets expressed and, under the leadership of the federal government, a national compromise is reached. They also have administrative functions in the building of some roads, the school system, etc. Economic policy is much more closely coordinated nationally than in the other federal nations like Australia or the United States, for example. There is only one legal political party - the Union of Comunists. 22. The "communes" or the local authorities work most closely with the economic enterprises and are increasingly taking the initiative in sponsor- ing and providing the initial capital for new enterprises. 23. The important economic decisions are made by the federal government. After consultation with the republican governments, it shapes the institu- tional framework of the economy and lays down the main policies through legislation, decrees or one-year and five-year plans. It retains control over the economy by means of its influence on the supply of credit, its tax system, the allocation of investment and foreign exchange resources, the setting of price ceilings and exchange coefficients, etc. The federal government can control the amount of savings in the community by: (a) vary- ing the interest rates paid by enterprises on their total assets - all interest paid goes into the banks for investment; (b) by varying the rates of profits tax and the proportion that is used for investment; (c) by setting the rates and conditions under which depreciation is charged; and (d) by deciding how much of normal budget funds shall be used for invest- ment. Perhaps about 30% of total savings is independent of government action: the profits after tax retained for investment, and the personal savings of individuals. Economic Enterprises and the Organization gf Production 24. The Yugoslav econony is unique. Starting with a highly centralized econory on the Soviet model, in the last five years there has been a pro- gressive decentralization of decision to the individual enterprise and an increasing introduction of market elements into the economy. 25. A brief statement can give only the main outlines of the economic system. But, first of all, several general observations must be made: a) The system is still evolving and it may not settle down for a long time. b) Conditions vary from one part of Yugoslavia to another. Slovenia, with a per capita income twice that of the national average and a long industrial tradition, is obviously better able to operate its enterprises than Montenegro which is still largely a subsistence econony.  AUST R 3 l A I M j LTDES I METRS _._.A J>sa > a~ tssr- - 400 0-400 Maribor ~~~~~~~~~~~~~~~~~~~~~~~~~~~400 -1500 1500 - 3000 S L 0 V E N I A '-- Vorn LJUBLJANA boti 9v__, __,_I"~~~~~~~~~s _ o a\b, RIJEK R 0 A T II- H A 0 Rovinj ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ o @@o w k W\-<\ So~~~~\\ \s.D,,brs.,ik,. FEDERAL PEOPLE'S REPUBLIC OF YUGOSLAVIA <_Vr>r_ POLITICAL MAP (( a - ~ INTERNATIONAL BOUNDARIES rp --- BOUNDARIES ol the REPUBLICS C 9t |< o ..... .. AUTONOMdOUS PROVINCES tst(\{ ;X I I I (I 0MARC40H60 00orn8 I RD-45 MAC 15 IBNIRDHE-G453IN  - 6 - c) The principal "businessmen", labor leaders and political leaders throughout the entire structure are members of the Union of Communists. This means that the economy may be more centralized than appears on the surface. 26. Agriculture, small shops and handicrafts are still mostly in private ownership - covering about 60% of the total population but only about 40% of the national output. There are strong inducements to people in these occupations to belong to their particular buying, selling and credit cooperatives. 27. The rest of the economy is practically all publicly owned. The direct part played by government in the management of the enterprises has been eliminated and in principle the enterprises are autonomous units run by their managements who are answerable to their workers. The workers elect the board of directors of their enterprise which then chooses the management. In practice, an able management seems to be at least as independent of the workers in major decisions as a management in a pri- vate enterprise economy is independent of its shareholders. Workers off the bench are usually no match for the manager and his assistants in a discussion of management problems and the main difficulty managements experience is in discharging workers. The managements are largely 4,ree to act accordin7 to the guidance of the market. 28. The enterprises have to pay the Investment Bank, which is an agency of the federal government, a fixed interest rate - usually 5i%-6% - on their assets. Net profits of the enterprise (after interest, deprecia--o.., other costs and minimum wages) belong to the workers in theory but a pro- gressive profits tax siphons off part of the profits for the various levels of government. General Communist oDinion appears to favor reinvestment of profits; periodically criticism erupts in the press when, for example, an enterprise pays out profits or as much as seven months extra wages. The government lays down the accounting rules to be followed to ensure that proper provision is made for depreciation and other charges. 29. Considerable progress has been made towards a market economy. Both consumer and capital goods are sold through free markets. The factors of production are also affected by market forces, working more or less imper- fectly. Wage and salary standards are set by the trade unions. Basic wages are low and are insufficiently differentiated but to some extent, these distortions are corrected by granting top people certain perquisites and through a system of profit-sharing. The interest rate does not play a decisive role in the sector allocation of investment resources, which are allocated to broad and, in certain instances, even to some narrow sectors by the government plans. Within these sectors, the banks lend their funds on the basis of their judgment of the profitability of the proposed invest- ment projects - but even here local and regional political pressures have some influence. 30. Market forces are weakest in the case of land and other natural resources. Agricultural land can be bought and sold freely but farmers are restricted to a maximum holding of 10 hectares. There has been some  avoidance of this throuqh the device of long-term leases. land used for coTmiercial or industrial uses does not get charged the full economic rate. The same is true in the exploitation of natural resources. The workers in a mine, for example, with a rich vein of ore even thouRh no more efficient, get higher wages conpared to workers in a mine with poorer ore. This prob- len has been recognized but not yet fully met. 31. In a99ition, as indicated below, the market mechanism suffers from important price distortions. Bankinca3Sv,ster. 32. The present banking structure is very new and still incomplete. It is composed of the Fational Bank, the Investment Bank, the Foreign Trade Bank, the Agricultural Bank (still to be organized) and Communal Banks in the cities and Cooperative Savings Banks in the rural areas. National Bank: 33. The Efational Bank performs the functions of a normal central bank - it holds the bulk of the foreign exchange reserves and the required reserves of the other bak-s; it is the bank:er for the government and the ultimate creator of money. It also has some very important povers as an inrtrument of economic and financial control. Al1 business payments have to be ma9e through it with information given as to the purpose of the payment. Th.> Bank, therefore, has a daily record of the flow of funds in the business and governmental sectors in the economy. It has the right to audit the accounts of any enterorise. 34. Powers are one thing; the ability to use them is another. While unquestionably the top manageTrent of the NTational Bank is very able, the effective exercise of the po'!ers of the Bank requires a large body of able and well-trained economists and accountants. This does not exist. Other Banks 35. The Investment Bank functions as a kind of capital market. It handles the federal and the republican investment funds, foreign loans, and influences the investment of the local authorities' funds. Its funds are derived mainly from the interest paid by enterprises on their assets, foreign loans and a part of the profits tax on enterprises. The Investment Bank finances about half of total net investment. It makes loans primarily to economic enterprises for new projects or for expansion. The loans are to be used for fixed assets and. permanent working capital. The Bank is expected to follow economic criteria in the grarting of loans within sec- tor allocations laid down by the governments in their economic plans.  36. The Foreign Trade Bank finances foreign trade transactions and is empowered to give medium-term exporter credits. The latter are, however, quite small so far. 37. The Agricultural Bank, when it is set up, is to give short and long- term credits in agriculture, taking over this function from the National and Investment Banks. 38. The Communal Banks - which are still being created - operate with local investm,ent funds. The Cooperative Savings Banks handle the invest- ment resources of cooperative organizations and mediate between them and other banks in granting some types of loans. Both types of banks give short and long-term credits. 39. Yugoslavia has been able to mobilize an impressive volume of domestic savings. In 1956, for example, the funds collected in the socialized sector for fixed investment amounted to 31%^ of gross material product. 40. The inv^t.X-Trent funds handled by the banks came to 44% of the total gross investbnent in 1956; in 1952 they supplied 56% of the total. Depreci- ation reserves financed 34% of the total. Since January 1, 1958, the enter- prises have control over the investment of their own depreciation reserves. The self-financing of the economic enterprises by plougning in profits expanded from 2.8g of the total in 1952 to 18% of the total in 1956. Finally, the share of budgetary funds destined to finance specific projects like ro-d building, water supply, etc., declined from 8% to 5%. Foreign Exchange and Trading System 41. Institutionally, Yugoslav foreign trade is organized much like that of other countries. Individual enterprises may buy and sell abroad directly or through specialized trading companies. As mentioned above, the Foreign Trade Bank handles the financial side of transactions in cooperation with correspondent banks abroad; the Ntational Bank runs the foreign exchange control. 42. The bulk of foreign trade used to be carried on under bilateral agreements but there has been considerable progress recently toward multi- lateralism. More than half of Yugoslavia's export proceeds are now in transferable or convertible currencies. 43. All agreements with Eastern European countries are on a bilateral basis. Yugoslav enterprises encounter the same difficulties in trading with Eastern Europe that Wdestern European enterprises do - it is easy to sell but hard to find goods to buy. 44. The foreign exchange mechanism is characterized by a multiplicity of effective exchange rates, varying according to the commodity, by broken cross-rates, and by exchange allocation to sectors of the economy. The complexity of the system makes it difficult to evaluate the basic soundness of investment projects. It also hinders a closer and more advantageous integration of the Yugoslav economy in the world economy. For these reasons, efforts are being made to move towards a simpler foreign exchange mechanism.  - 9 - 45. The official exchange rate is 300 d2nars per dollar: the tourist rate is 400, and erigiants remittances, 600. Most commercial transactions are based on "settlemert rates". For the U.S. dollar the settlement rate is 632 dinars. These rates are now fixed.: previously they fluctuated. The settlement rates can be fixed indepernently for different currencies. Last year, fourteen such broken Cross-rates were in existence; at present they have been abolished except for -rarying higher values for the dinar against Turkey, Israel and Egypt and a flat 5% against the Eastern Luropean countries. 46. A system of exchange coefficients is applied to the particular settlement rate to indicate for each commodity the extent to which the settlerent rate has to be adjusted. The purpose is to equalize donestic prices -w.!ith prices abroad. At their peak, there existed coefficients for 39 different classes of exports and 26 for imports. Recently their number has been reduced to 16 for exports and 19 for imports. At the same time, also, their ranae was curtailed. Another downward revision is to be carried through in 1958 an' they are finally to be replaced by tariffs. A system of tariffs iE a7ready in preparation and is to be introduced, on a trial basis, in l)?c. 47. The present coefficients (listed in the statistical appendix) result in the following rate structure: a) The export rates encourage the export of more highly processed commodities; manufactured goods get better rates than agricultu-ral conTnoities. The import rates are the obverse of this. The range of rates on exports is from 308 dinars per dollar (on raw magnesite and fire- wood) to 1,232 dinars per dollar (on electrical machinery, gas oil, elevators, purps, etc.). The range of rates on imports is fromr 1,896 linars per dollar (on motor oil and lubricants) to 379 dinars per dollar (on raw hides). b) Taken as a whole, the export rates, as weighted by the volur.e of exports to which they apply, give a more favorable rate for foreign currencies than do the im- port rates.  - 10 - III. .STRIJCTUFE OF TE7E ECCGVQY r7ational Accounts 48. The accomparying chart presents a bird's-eye view of the economy, indicating rough orders of magnitude. 1/ The m,ost significant points are; a) On the Droduction side, mining and manufacturing produce a greater share of the gross material product than agri- culture does. Yugoslavia has roughly reached a stage of industrialization comparable to that of Portugal. b) On the expenditure side, the outstanding feature is the high proportion of the product devoted to investment - comparable in Western Europe only to that of Norway. c) The snall share of international trade is also to be noted. Thile one would not expect this to be especially large in a country like Yugoslavia with an economy balanced between aF;riculture and industry, it is particularly low. Agriculture 49. Yugoslavia is mairly a cereals and livestock producer. Agricrlbttre is much less important than before the war. Last year, the number of pcople on the lard had been reduced to 58% of the total population cormpared to 75,c in 1939. Two-thirds of the active population still find employment in agri- culture; but its contribution to national income and exports had falle. from over 50% to 30% and 25% respectively. 50. The density of population on the land remains one of the highest in Europe. Agricultural "over-population" or "under-employment" remains a mrajor problem. But it is no longer increasing; in fact, it is being reduced. How- ever, it is lilkely that without large-scale emigration or a drastic fall in the birthl iate, this problem will re-^ain for at least another generation. 51. In 1956, the total agricultural area was restored to its prewar size of 15 million hectares. The area devoted to cereal crops has declined by more than 800,000 hectares. Industrial crops, vegetables and fodder now occupy more acreaae than in 1939. During the postwar years, the areas devoted to tobacco and potatoes have been steadily expanding. 52. Whether agricultural output increases, depends on the peasants since more than 80% of the land area is under private owvnership. Hence, the necessity for government policies that will ensure the fullest coop- eration from the peasant. In this respect, policy in recent years has decidedly improved. Yost collective farms have been disbanded. Agricul- tural cooperatives are now voluntary with free entry and free exit for the individual members. Through his cooperatives, a peasant can market his produce, obtain credit, purchase seed and fertilizer, and the govern- ment encourages him to join. The cooperatives fulfill important economic 1/ Yugoslav statistics while greatly improved still do not fully recognize the value of "services" and are still subject to fairly large price distortions between sectors.  YUGOSLAVIA SUPPLY AND USE OF RESOURCES - 1956 (PERCENT OF GROSS MATERIAL SOCIAL PRODUCT) SUPPLY...'.'...... USE PUBLIC CONSUMPTION ..CONSUMPTIO?' *.:: .. I %.tbNSUMPTION * FQR PUBLIC *. -;WpERLFARE 30/ INDUSTRY 450/ PERSONAL CONSUMPTION :0:: TOTAL o ~~~~~~~ = ~GTRO SLS D. MATERIAL 0 SOCiAL TOTAL PRODUCT AVAIL- AGRICU LTURE PRODUT100/ ABILITIES <,~~~~~~~~~~~0 - .' cr, ~~250/ IIO10%- * o ~FORESTRYv 2ET. % . . .:CONSTRUCTION 5% _FRWRIG.............: ::: _ - ASTSS l Z ~~~~~~~~~~~~~~~~~m 0 0 ~ TRANSPORT AND . .n COMMUNICATIONS 0/0 .. FOR W R L. FOR FIXED ASSETS *:: COMMER~CE, CATERING, 23% -t * . ~~~AND TOURISM **z: IPRS OF GOODS AND SERVICES EXPORT AND UNALLOCATED GOODS AND ES RESOUR~CES 10 Ia 2/28/58 1363 IBRD- Economic Staff  - 11 - functions consirering the small size of most holdings and the need to mechanize and to modernize agriculture rapidly. 53. By 1953, the system of compulsory deliveries at fixed prices to a state monopoly was abolished and peasants now can sell their produce to whomever they prefer at free market prices. In practice, most sell to cooperatives. Agricultural prices can (and do) fluctuate freely. Last year, in order to stabilize agricultural incomes and to encourage produc- tion, the government introduced minimum prices for cereals - which have kept up themarket price. In fact, thanks in part to this support, agri- cultural prices have risen more than industrial prices. Compared to the position before the war, prices for agricultural commodities are now relatively more favorable than prices for industrial products. 54. The rate of investment in agriculture has tripled since 1952. Through the cooperatives, credit has become mcre abundant. As a result, the number of tractors doubled between 1951 and 1956. The use of ferti- lizer has jumiped from 80,000 tons in 1952 (47,000 tons in 1939) to around one million tons in 1957. This trend is to continue; the plans, for example, are to import 7,000 new tractors in 1958, which is almost half the present total number in use. 55. IMechanization of agriculture will raise production through better and more rapid cultivation: deep ploughing compensates to some extenlt for the dry seasons in many cereal growing areas while rapid harvesting cuts crop losses in harvesting and permits larger acreage to be sown before winter. In 1953 no hybrid seed was available; some 500,000 hec- tares were planted with hybrid seeds in 1957. The stock of cattle anJ. pigs is being improved by importing selected breeding stock from abroad. 56. The improvement in the general economic situation also helps; an increased supply of consumeis goods offers additional incentives for the farmer, and markets for agricultural produce are expanding. For the future, better transportation, domestic marketing and storage facilities, more food processing plants, and the opening up of additional markets abroad are planned. 57. In 1957, with the help of excellent weather, a bumper crop was har- vested, for the first time considerably surpassing prewar, and coming very close to the goals set for 1961. 58. If the present favorable policy towards agriculture continues, the chances of meeting the 1961 agricultural goals are good. In the longer run, government policy as to land ownership and taxation of farm incomes may be important. At present, land ownership is limited to 10 hectares. l'ith mechanization, the optimaum farm size will undoubtedly increase. Productivity will therefore be limited if the more efficient peasants are not able to get more land. Since it will be a long time before industry could possibly absorb all the labor that could be freed from agriculture by dropping the 10 hectare maximum, the political pressures for keeping such a limit on land ownership are obvious.  - 12 - 59. The basis on which farm incomes are taxed provides an economic incen- tive to efficiency. Income tax is levied not on actual income but on what an average income from the particular class of land should be. On the other hand, the tax burden appears heavy to the farmers, because it absorbs a substantial portion of their cash income, which aziounts, in the average, only to 40% of their total income. Industry- end cining 60. Yugoslavia has succeeded in establishing a sizeable industrial basis. Industrial output is now running at around three times that of the prewar period. Among the industries which have grown rapidly are iron and steel with an output of around one million tons a year (based on domestic iron ore but imported coking coal), railway rolling stock, electrical equiprent including generators, agricultural equipment, ferti- lizers, and alumirnum (producing around 15,000 tons a year), as well as radios (over 125,000 sets a year) and the usual first-stage-of-industriali- zation products sach as shoes, textiles, furniture, soap, etc. Production of automobiles, trucks and marine engines is also under way, based on foreign liceLses and technical help. 61. Yining output has also risen. Coal at over 17 million tons of coal is almost triple the prewar level. Some worthwhile denosits of oil have been found but total pro0uction is still s!-all - over 300,000 tons a rear - and is held back by lack of investment funds. Production of other minerals has also grown rapidly. Basic Services Electric Power 62. The output of electricity is now almost five times as much as before the war. In 1956, total outpat was 5 billion kwh, i.e. about the same per capita as in Mexico. After having been a bottleneck in the economy, in the last year or two the supply of electric power has begun to match the demand. During this period, too, the disconnected networks have begun to fit into a grid covering most of the northern and central part of the country (see power map), thus improving stability of supply. 63. The capacity of the distribution systems within the cities has not kept pace with the increased growth and this is now causing difficulty. Power rates are relatively low for household consumers and this has re- sulted in toc rapid a shift from other fuels. While the rates generally are economic in the sense that total costs are covered, there is no margin to finance expansion and the industry is dependent for investment funds from the rest of the economy. Transport 64. Transport is one of the weak sectors, although considerable progress has been made. The iron and steel industry at Zenica and the industries around Sarajevo have in recent years been tied into the standard gauge net. It is planned to build standard gauge connections from the center rail net  AUSTR,A H U R Y , J ALTITUDES IN METERS