InE, P'i _g If JI t L n MDY 1 EA112 b 1L L ,02 Vol. 1 This report was prepared for use within the Bank. It may not be oublished nor may it be quoted as representing the Bank's views. The Bank accepts no U agulI~Iu4ily lur iu uvcuruvy or completeness OT the COnTenTS OT TRe report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE ECONOMY OF YUGOSLAVIA January 19, 1961 Department of Operations Europe, Africa and Australasia CURRENCY EQUIVALENTS Settlement Rate (prevailed until December 31, 1960) $1.00 = 632 dinars 1 dinar = $0. 001582 1 million dinars = $1, 582 1 billion dinars = $1, 582, 000 Exchange Rate as from January 1, 1961 $1.00 = 750 dinars . .A4.. - t~n nniqll~ 1 million dinara = $1, 333 1 billion dinars = $1, 333, 000 TABLE OF CONTENTS Page No. BASIC DATA SUMARY i I. BACKGROUND 1 Historical Background 1 Poulation and Emnlovment 2 Recent Economic Growth 2 II, INSTITUTIONAL ORGANIZATION 4 Role of Government and the Plan 5 The Market 8 F-4 n- n- i SYs e mr 9 Investment Resources 10 Foreign Exchange and- Trdig yseB1 TTT QfDTTr'rPTTTl rT muT? TrrTrui AV 11aioa Acounts Agriculture 15 Industry and Mining 16 Basic Services 17 Public Finance Money Supply Prices Foreign Trade 19 1/ Balance of Payments IV. PROSUT ITj UEDITWURThINESS 41 Economic Prospects General Policies 22 Sector Goals Balance of Payments 24 Exchange Reform 4 External Debt 26 Creditworthiness 2o STATISTICAL AFFENDI( ANNEX A - AGRICULTURE ANNEX B - TRANSPORT ANNEX C - ELECTRIC POWER UGUSLAVIA Basic Data Area: 257,000 square kilometers Population: 18.7 million Yearly rate of increase: 1.3% Population in agriculture: 51% Gross National Product, Estimated, 1959: Total - Est. 2,700 billion dinars; $4.3 billion equivalent (at 632 dinars = $1) Real growth rate, 1953-59: 9.5% yearly Per Capita - '230 equivalent Real growth rate, 1953-59: 8% yearly Percentage of Estimated Gross National Product. 1959: Gross investment 30% Exports of goods and services 18% Federal govnrnment exnenditures 12% (Defense) (7%) Money supply 31%0 Balance of Payments, 1959 (million dollars): Exports, f.o0.b. 486 imports, c.i.f. -707 Net invisibles 83 Private donations 33 Interest on debt -10 Net -115 Financing: Net loans, credits, official donations 85 Reparations, etc. 31 Total 116 Net improvement in foreign exchange position +1 Rnoo7(iPn (.P+ ic42) mA97nJIio YUGOSLAVIA INDUSTRIAL PRODUCTION (INDEX, 1952 ="i00) 250 -250 CONSUMER GOODS- 200 - 20 CAPITAL EQUIPMENT., TOTAL 150 INDUSTRIAL PRODUCTION 150 100~ tRAW MATERIALS 00 50r1 50 O '0 '39 1950 1951 1952 1953 954 1955 1956 1957 1958 1959 1960 ELECTRIC POWER [TRANSPORT (Billions of KWH) (Billions of ton-km) 6? l 10-l RA LWAY 4 ROAD (COMMON CARR:ERS) 0 f0 300 1.5 COTTON, RAYON AND STEEL SYNTHETIC MIXTURES (Millions of tons) (Millions of sauare meters) 200 --- 1.0 5 B 7_______ 1 14 r- n- 1 659 IBRD - Economic Staff YUGO SLAVIA AGRICULTURAL PRODUCTION,MAJOR CROPS (MILLIONS OF METRiC TONS) 8 -r--j- 1 1 118 7 7 6 6 55 1i/ \ >i 1\ 1 4 4 lp\ ,POTATOES .WHEAT 2 or, I SUGAR 2 \ V ~\.4V1~i.%\i/1 VBE ETS -ALFALFA o OIIL 0 '30-39 '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 AV. ANiMAi PnPi ULATInN (MILLIONS) BEGINNING OF PERIOD ,-.--" POULTRY 2..- ..---" EP........................2..................... _.,CATTLE u -u '34-38'50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 AV. IBRD-Economic Stoff 7/13/60 1658 YUGOSLAVIA BALANCE OF PAYMENTS ON CURRENT ACCOUNT (MILLIUNS UF U.S. UULLARS) 0 200 400 60080 1030 1 EXPORTS I R 'l P" fE NET INVISIBLES RECEIPTS PAYMENTS I IDflWNDT 1950 RECEIPTS jV/ i 4 1 I PAYMENTS 1951 HPRIVATE DONATIONS RECEIPTS V4ell 952 RECEIPTS PAYMENTS 1953 RECEIPTSV4fef4e 44M PAYMENTS 1954 [ 1 RECEIPTS S PAYMENTS K ~ 2 Q Q 1955 RECEIPTS f PAY MEFNT S 1956 I J RECEIPTS PAYM 'FNTS' XXXX XXXXYYYXX RECEIPTS PAYMENTS RECEIPTS PAYMENTS PAYMENTS 7/16 r 1660 YUGOSLAVIA EXTERNAL PUBLIC DEBT OUTSTANDING (MILLIONS OF U.S. DOLLAR EQUIVALENTS) 5001 -p500 JANUAKY I U' E.ALCM TEAR 400 400 3000 NATIONALIZED PROPERTIES REPAYABLE IN SOVIET BLOC CURRENCIES :I J DELIVERIES F11111 [11T[INTER-GOVERNMENTAL lli DEBT I OHflrTli-LONG-TERWIM 0 REPAYABLE IN DEBT DEBT TO IBRD AND WESTERN OTHER INTERNATIONAL CURRENCIES ORGANIZATIONS PRE-WAR DEBT - 1951 1955 1960 1965 7/13/60 1663 IBRD-Economic Staff SUMIARY 1. After the break with the Cominform, and especially since 1952, Yugoslavia decentralized the nrevious highly centralized economy: local government got a key role; enterprises, although under social ownership, largely ained autonomy under qelf-mannnment:! the drive towards farm collectivization was abandoned; forced farm deliveries at fixed prices to the stat Iere gven nn* and marke+t elments lWre intrrduced on a wide scale. Though the main outlines have changed little in the last fewI. yrs, the system is til1vlvn Thep g7mrr~nt+ rptai ns strong but general controls to give overall direction to the economy, mainly policies, the allocation of investment resources, price controls, and the 2. Since 197w)3 a high ivestment rate has been maintainedA and th.e economy has grown vigorously. This growth was aided by ample raw mater- ial resurce~s, and excellent energ potential and" surplus labor. *indutir is now more important than agriculture which, before the war, was by far the most important economic sector. Development has been more balanced in recent years with increased emphasis being placed on agriculture, which in te last few years has begun to snow the results of ute revolution in agricultural techniques. The living standard has improved rapidly in th last few years with increased personal consumption and a markeu epanave of social services. 3. Over-population on the land remains one of Yugoslavia's crucial problems. However, industrialization has absorbed the whole of the in- crease in working force since the end of the war and diverted labor from agriculture. Scarcity of skilled people, in spite of an intensive train- ing program, may continue to hinder faster growth and greater efficiency. 4. Money supply has expanded rapidly in the last few years from bank credit for inventory financing and consumer credit. At least part of this increase is justified by the rapid development of the economy, but, quite probably, the increase in 1959 was excessive. At any rate, the Central Bank took steps to curb the increase during 1960. 5. The price structure is still burdened by important distortions: interest rates on investment loans are low; maximum price ceilings cover some 20% of all industrial products; notification of price in- creases is required for a large number of products; and competition from abroad has been screened by a wide range of multiple exchange rates. The government recently has corrected some of the greatest distortions in rent, electricity, and transport. Apart from these corrections, the price level has been stable in the last few years. 6. The country has experienced heavy deficits on the balance on current account. largely eaual to the gaD in domestic food production. However, foreign help, mostly from the West, filled the gap and made it nosible to build un inventories, although not yet to fully adequate levels. During the last eight years, foreign trade expanded vigorously - ii - more rapidly than the gross material product - partly as a result of the resumption of trade with Eastern Europe. Yugoslavia has become an important exporter of semi-finished and manufactured goods. 7. Economic progress during the last four years was particularly vigorous and the ambitious nlan for 195r61061 will be onmeted +hi 1-n nno lan ahead of schedule. The prospects for continued rapid growth are good. Ac- cordinp to the new nlan for 161_19Ar+, ttal gross material pro+ i to grow by 11% annually or somewhat slower than over the last four years. The ta_rgPetS do not apa resnbeal-though there May I b-sm lr+FalIe- cause the reform of the foreign exchange system will have a widespread impact 'P11-- othfo4--------- Tla -rg n z t o -L ~ Ullt5I~ LVL _&. Z ;:UUi4U J.VU_LV,:- Uliv t:_LLiU1ICL tion of the exchange coefficients and the adoption of a uniform exchange rate at a new puzz, the in trouton of Uriffs, and temporary export taxes. For this reason, it is not possible to forecast future developments in the balance of payments with a reasonable degree of precision. Most likely, by 1965 ex.- ports will have expanded considerably. Barring unforseeable international tension, Yugoslavia may also expect to continue to receive foreign assistance. 7. Un December 31, 1959 the external debt disbursed and outstanding amounted to $385 million. A further $157 million of external debt had been contracted but undisbursed at the end of the year. in addition Yugoslavia is now undertaking some $275 million of new borrowing in connection with the exchange reform. This means that debt service over the next five or six years will probably amount to something of the order of 155 of foreign exchange earnings. 10. In the long-run the favorable prospects for economic growth in Yugo-- slavia provide a basis for servicing considerable additional debt. Debt service in the next few years will, however, be high owing to the compositLon of the existing debt and the service of the credits received in connection with the exchange reform. The management of the balance of payments under the new exchange system will constitute a challenging task for Yugoslav economic policy. In the recent past, however, the Yugoslav Government has demonstrated its willingness and ability to make drastic adjustments when necessary and there are therefore good grounds for confidence that decisive action will be taken to meet the problems which the future may bring. i. BAUKGRUUND 1. A popular Yugoslav saying, which gives a good introduction to the country, runs like this: "Yugoslavia is one country, with two alphabets (Latin and Cyrillic), three religions (Serbian Orthodox, Roman Catholic and Moslem), four languages (Serbian, Croatian, Slovenian and Macedonian) five nationalities (Serbs, Croats, Slovenes, Macedonians and Montenegrins and six republics (Serbia, Croatia, Slovenia, heedonia, Montenegro and Bosnia-Hercegovina)." 2. Yugoslavia is about as large as the United Kingdom or Western Germany, but has about one-third the population. The country can be divided roughly into three main regions: (1) the northeast, the granary of Yugoslavia; (2) a narrow coastal strip along the Adriatic Sea; and (3) the remaining mountainous two-thirds of the country. Even today communications between these areas are still poor. Historical Background 3. The still important cultural, national and economic differences among the Yugoslav neonles were develoned durinrr the many centuries when they were divided between the Ottoman Empire and parts of Western Europe. Those narts of Ynunslavia that. Ehnd the nlnest contant with Western Enrone are still the most advanced economically. Inter-War Period 4. Between World Wars I and II, Yugoslavia remained primarily an agri- 01nln.1ol Onlin+r T+ wae fma+A +ba+ 4 10 4 m4 Iilr, nannli rr about 40O of the total population on the land were "surplus". This was a size of farm holding was 5 hectares. The countryts economic character was and ores. After World War II 5. By the end of World War II, Yugoslavia became a Socialist Republic W-.L O..L UCL .A U I U~' ±ILC U_L U l.L±.IC U11 4L t; U~'J U I. I U V .L , U 11 1 Industry, mining and commerce were nationalized and a campaign begun to establisi collective farms. mhe economy was organizeu on1 1 U1e Un V1 detailed centralized direction. Output goals, the supply of raw materials, sales for each enterprise were determined by the central government. As soon as the extensive war damage had been largely made good with around t5OO million of uINRRA help, the country embarked on a Soviet-style fiv- year plan for the years 1947-51. First priority was given to investment in heavy industry. Some success was achieved in raising industrial output. Agriculture, however, retrogressed. 6. In 1948 came the break with the Cominform countries. Trade with the USSR and its satellites, which had accounted for half of Yugoslavia's trade in 1947, stopped completely. Investment projects dependent on - 2 - equipment imports from Eastern Europe could not be completed and new markets for exports and new sources of imports had to be found. Under the threat from the East, defense expenditures rose to absorb one-sixth of national product. The supply of raw materials fell short. Industrial production stopped rising. In addition, agriculture suffered severe losses from droughts in 1950 and 1952 - made more severe by the passive resistance of the Deasants to government Dolicy. Living standards declined. Severe food shortages and a decline in industrial production were averted only by grant aid from the United States. United KinFdom and France. and foreign loans. 7. From 1950, and especially since 1952, the old system of detailed central planning has been progressively replaced by freer economic relation- shins ha.ed nn aut.no.ns ent-ernrises oneratedl under a system of self-manar-e- ment. Agriculture has been treated better, heavy industry has lost its top nrinritv an9 thep nlaimq of consumr are more resnented The staLe reached in this evolution will be analyzed in later sections. Population and Employment 8. Population growth is slowing down. With the death rate around the that the rate of increase of population is down to 1.3% per year. It is half of the country the rate of increase is already less than 11o per year. 9. With the progress of industrialization, the proportion of total population in agriculture had dropped from the prewar three-quartue o just over one-half by 1960. By 1965, this is expected to decrease to around two-fifths. Currently, and this is expected to continue, aou UU,0U 1ew workers a year find employment outside of agriculture. With the total labor force now growing at around 110,UUU a year, agriculture loses around 90,000 workers a year. But even with the rapid progress being made, there is likely to be surplus population in agriculture for the next five years and beyond. 10. Managers, engineers and accountants are thinly spread throughout the whole economy; highly-skilled workers are in short supply. Goverrneu a2la industry have initiated a vast educational effort to train qualified peo-?le at all levels. As impressive as this is, the inherent difficulty of in- creasing rapidly the number of trained people may represent the severest brake on Yugoslav economic growth in the short run. Tnis is particularly true of managers where no specialized educational facilities as yet exist and the Yugoslavs are only now discussing with the U. S. Government the possibility of aid in setting up a business administration school. Recent Economic Growth 11. As Yugoslavia uses Marxist terminology she excludes most services from the national product and measures her growth by the changes in "gross material product". "Material product" is estimated to run 10 to 15% below a corresponding "national product" estimate. After the stagnation of 1949- 1952. the economy has grown rapidly. Gross material product in 1960 is - 3 - almost double that of 1953. Because of the still existing substantial price distortions between sectors, the national accounts figures have to be inter- preted with even more than the usual caution. 12. This increase has been due to a number of factors. Investment has been high, at 30 to 35% of gross material product, and with the progressive freeing of the economy, has gone increasingly into more productive uses. In the first few years the government concentrated on the most important projects (the "key projects") begun earlier and with the help of two IBRD loans, completed them. Yugoslavia received over 800 million from the U.S. in various forms of aid and surplus agricultural commodity sales in 1953-60 and 90 million eauivalent of reparations and similar payments from Germarr and Italy and 075 million from Hungary. The strengthening of market forces has made the utilization of existinp canital more efficient and encourared greater effort. The supply of consumer goods has increased from domestic outnut qni imnort. and their qvqilqbiity h-% -t.ini.tP ayrpt,-r Pffnrt,. ambitious, was well balanced. Investment and other aid to agriculture were iii r,,-rz A ~ ~ -,' 4,n~~~ nA.,An+ f'v - r-+rnc n-+ Jnr vr?i.r---in" nnyr-mi_ tal, the supply of raw materials was improved considerably, and basic insti- tuton111er _.W-1~,~n,l created or betrOraie toase a mcotner and more efficient operation of the economy. As a result, the major goals year. 14. The economic growth has permitted a marked improvement in the stand- consistently permitted such an improvement although there were strong pres- sures to devote a greater share of the increase in production to invetEt. 15. In addition, expenditures for the social standard have approximately tripled in real terms, and this is helping the consumer through better health services, housing, a safer supply of drinking water, etc. The noteworthy improvement in the quality of consumer goods, which followed the introduction o2 free marKets, constituted another real benefit. 16. it was not until 1957 that the new policy of not coercing the peasants into collective farms and the application of improved agricultural tech- niques paid off. In that year, for the first time, prewar levels of output were appreciably surpassed. In 1959, again aided by good weather, the crops were almost embarrassingly high: offices and schools had to be used for storage and in some instances due to lack of transport crops were left in the fields. -4- II. INSTITUTIONAL ORGANIZATION 17. The Yugoslav system of economic organization is unique and unprece- dented. It is the result of about in warof vp.n,iqr rnim-nt nnf adaptation and is still evolving though the main outlines have changed little in the last few vear. It. differs from no+'r 'n ana +'I h n- 1952 Yugoslav system in the large measure of freedom from governmental interference in the operation of economic an+oprrnes nan +ithe imp-rtanc of the market and of competition as central features of the system. It differs fromn Wesqtern Eurrope: i-nt+ 1 he absence of pi,aueownerh. in indust--+ and a higher degree of over-all governmental direction of the economy. 18. The fundamental reasons for the creation of this system are a belief a centralized economy and a desire to create conditions in which the workers theseles an xec-ie some directiLon over the enerriesi whichl the1y work. In the Yugoslav view, evolved during their conflict with Russia, cetrlie d con by te state of an economy leads the people in poJer to identify their own material welfare and privileges with the general wel- fare o the dtriment of 3e rest of socieTy. Also, as stated by E. Karde-1, Vice-President of the Federation, it is not possible "... to work without ounsuseuer erUrat, oub we consider such errors less dangerous if they are committed in conditions of active and free initiative of the people than when made by bureaucrats who consider themselves infallible." L9. By experience the Yugoslav leaders have found that an economy made up of a multitude of autonomous enterprises competing with one another and with the incomes of the people working in an enterprise dependent on the economic success of their particular enterprise is more productive and dynamic than a highly centralized economy. Through trial and error the degree of economic freedom of the enterprises has been and is being enlarged both through giving them freedom of decision on more and more matters and through governmental action in widening or improving the markets in which they operate. It is unlike Western economies which may or may not accept competition as a rule of the game that the government should enforce but where the enterprise, as it were, grew up as natural independent organisms. In Yugoslavia, the Union of the Communists, through the government, the trade unions and the press may exercise a pervasive influence throughout the economy, but as a matter of policy and conviction of the leaders this influence is being used to try to make competition work more effectively as the driving force of the economy. 20. Over half of the people in the working force (i.e., a greater propor- tion than in Western Europe) still work for themselves as peasants, artisans or small shopkeepers but their numbers are gradually decreasing. The private ownership of land is limited to 10 hectares. With the increasing technical advantages of cultivating larger areas, the peasants are finding it to t:eir benefit to use cooperative services or to sell out to cooperatives or to large farms run as economic enterprises. The small shopkeepers are being displaced by supermarkets and department stores. - 5 - 21. The rest of the economy is "socially-owned". This is a particularly difficult concept to grasp: it is not equivalent to government ownership in the Soviet manner as the Russian attacks on the Yugoslavs for their "hostility to state ownership" has made clear. Roughly it seems to mean this: the assets of an enterprise belong to the nation or society but they are administered by the enterprise in trust for society. The enterprise has to pay interest on these assets to maintain their value intact and pay profits and other taxes; for the rest, the incomes of the people working for the enterprise depend mainly on how well they run the enterprise. Role of Government and the Plan 22. The Federal Government shapes the institutional framework and gives general direction to the development of the economy by means of five-vear plans. The Yugoslav "plans" are something quite different from those of Eastern Europe: the Yugoslavs even claim that theirs are more flexible than the Indian five-year plans. Probably the closest parallels are the French five--vear n.nln cf modrni2ntion. 23 Tht- orf~ t-he pl an is co .nvTeyred by-, the adJ ec.ti i7p ii.pc hi the government: it is a "perspective" plan. It lays down the major goals tc h~ pph~TCd I ~~+ im the estimate -3 of +± i-~<p ~~ ~cfr-~ put and employment, the aspirations on the distribution of total available resources btenpublic and --4-te cosmto ~ivsm n ir and-o total investment by main sectors and main categories of investors, and a 0+. T x, n ad~ A 4 4-+ Jn,+ 4- 11 - F as.. t Lr~r~.na + 4 mm_ ,) ~ " ULt _UtUJ L U _ .1 Lt UL,J. .4 1J U. k CI. a Pv_; LUL -oLILCI DU ur- Va ke con ,+ -n that.'.I the plans give to the enterprises, the economy is guided in the desired diLrection -Largely by broadcL meas Uures,; i mluu3y fiscal and finaCl.-LL These_ include the setting of the rates of taxes levied on profits, incomes and sales; the prices of publi utiliLes and some ohUer services and counuuL- ties; the interest rates paid on the assets of the enterprises; the reg- ulations governing the fixing of minimum wages (or broad hints at the raUe of increase to be regarded as reasonable); and rules governing the disposal OfL wt-, rtaLinled profitsU of He1terpri::esV ard the dercainrates or uses of depreciation reserves. In this way, the over-all rates of saving, in- vestment and consumption in the economy can be broadly affected. The general direction of investment is affected by the broad allocation of the general investment funds wlnich make up almost half of the total) by the government to economic sectors. The implementing action of the government is decided each year through an annual plan. 25. Within this framework the execution or the plans is flexible because it depends on the action of hundreds of enterprises subject to market forces. The lending of the investment funds under control of the banks is influenced by market criteria within the sectors. The plans do not contain any pro- duction or other targets for an enterprise against which its success is measured or the incomes of its employees regulated. An enterprisets success is instead measured and rewarded by its profits and the incomes of its management and workers depend on the magnitude of the profits. - 6 - 26. The republics are important as a means through which the viewpoint of the various regional interests get expressed and, under the leadership of the federal government, a national compromise is reached. The republics. out of their share of tax revenues, help to provide funds to the banks for development projects beyond the scope of the individual communes and help the federal government in the implementation of its economic policies and development plan. 27. The basic governmental unit inr the rpubnlin is the nommune, or local government unit. The commune is integrated into the economic and the social structmrp in n iay t.ht no other nornmental unit is Tnai- tion to the economic enterprises, the non-economic organizations - hospitals, schnnls_ apa-rtmenPnt house orhousing estates, agiutra Iratsa-opr atives -- have a measure of autonomy depending upon how financially self- zations have is the commune. A central role here is played by the represen- tat iv.es- to thre legisl1a tive boie ofj- the commune wh r lce partly on an occupational and partly on a territorial basis. Consequently, there is w. . . M. SLj~ U E3 ULLM~SI U UA U_LI t-U U I 1--_Pl U De_jJ UdL U.LUII LU 1 VA ~I-.4J L'U U prises or social organizations in the communal government. As is usual ir. 1111SlUIL111LIJU Lb fa0 au d Li-L CUua_ul U~L II5 organizations have more influence on the communes or the communes on them. 28. The commune is responsible for the economic activities in its territory: it has to authorize the creation of new enterprises; it provues investment funds out of its tax receipts for the local banks to lend. The commune is free to draw up its own plans but these are in fact little more than a means of informing the central government and others of the hopes and intentions of the communes. The commune is increasingly taxing the initiative in creating new enterprises. Local pride is thus coupled with economic incentives in stimulating the enormous drive and pressure for investment which is one of the striking aspects of the economy. The Enterprise 29. The foregoing inevitably had to discuss some important aspects of the role of the enterprise in the economy. Some further description may still be needed. The first point is that a Yugoslav enterprise is much more like a modern corporation in the West than a producing unit in Eastern Europe or even a nationalized industry in the United Kingdom. Probably the closest parallels would be Volkswagen in Germany, Renault or the big banks in France, Finsider or the big banks in Italy, or Iscor in South Africa. A main difference from these latter is that the incomes of the workers and management in the Yugoslav enterprise are directly related to the profits of the enterprise and the workers and employees chose the board of directors of the enterprise. 30. A Yugoslav enterprise is expected to sink or swim on the basis of its own economic efficiency. If it runs at a loss, it may be reorganized by the commune or it may go into liauidation. The enterprise has to provide out of its gross receipts for its costs (raw materials and other supplies, -7- e, an iuerest drage on its net wortn, aepreciation, interest on borrowed funds, any turnover tax and social security contributions). The net receipts are then available to pay minimum wages and the remainder is subject to a progressive profits tax which at its maximum may take as much as 38, of this. Ine remaining profits are then allocated by its board of directors, the Workers' Council. These profits can be used for paying additional wages, social purposes, ploughed back into the business, paying off debt ahead of time, or set aside in a reserve fund. While the allocation of the profits is subject to some regulations the trend and policy has been to give the enterprise more and more freedom to make its own decisions. While the accusation is not accurate, it is interesting that the Russian theoretical journal Kommunist felt impelled to attack this development as representing "the blossoming of private enterprise." 31. The enterprise must maintain the value of its assets following the prescribed accounting rules laid down by the National Bank which audits the accounts to ensure that the rules are followed. The enterprise pays interest to the General Investment Fund for the use of its assets. (This interest forms an important part of the savings of the economy.) 32. The director of an enterprise has a special status; he is appointed, on the basis of public competition, jointly by the Workers' Council and the commune. The director organizes and directs the operations of the enterprise and carries out the policy decisions of the Workers' Council. In oractice. he is the central force of the enterprise because of his skills and overall familiarity with the enterorise. The Workersl Council cannot take discioli- nary action against him except for serious mismanagement, when it must be able to prove its case before a public commission- If it fails- it must itself resign and new elections are held. 33. In general, managements have been largely free to act according to th rnidanof nf the market in +.hir ntnut. and snle policie Yugoslav industry has been weakest in raising productivity. An attempt is being and group pay according to productivity. 34. The system of enterprise self-management demands a good deal of the work force; in part.icii,ar it. demandsc that the workers have to lear-olo at the interests of the enterprise not only as its employees but as the staff receive much higher incomes than they themselves receive to get sildpeople tornthe enteprs attegets rofit Ths, learned, but the lesson has not been completely accepted everywhere. 35. The establishment of new enterprises seene to be a smoother process which specialize in investigating the resources and market possibilities for new enterprises in a coa enap ationlto the Inesary ak and organizing finance for a loan application to the Investment Bank and in ge tting an enterpriseu t Qlxit 36. A natural result of the systom is a tendency to start big enterprises rather than small ones. An attempt is now being made to persuade large enterprises to hive off specialized departments as new independent enterprises ,Lich could serve several enternrises, The Market 37A Considerable progress has been made towards a market economys The Yugoslav leaders appear to be convinced that the market and competition are the most effective instruments in securing efficient use ofreocsan stimulating production. However, because of the distortions in the economy exchange position not permitting free competition from abroad, there are stil man1. uLy admintrativ meaure in ffect thatUtUJ lii the exen of the. ,I.U±JU ±U~.U1 L.UIZ operations of the market. 38. Both consumer and capital goods are sold through free markets. Unere there are an insufficient number of producers to secure effective competition the government has imposed price ceilings, has required prior notification before price increases, or has imposed special turnover taxes to prevent monopoly profits from being made. These devices are recognized as unsatis- factory and, as is discussed below, the new foreign exchange system will allow foreign competition to act as the regulator in such cases. The government also takes action against agreements entered into by enterprises for the purpose of controlling prices or dividing markets or other restric- tive practices. 39. Among the most important distortions have been the low prices of electric power, transport and rents. All of these have been raised dras- tically recently. At the beginning of 1960, rents were increased by 1505, power rates on home consumption by some 130% and railway goods rates by 15. These parts of the economy now meet their current costs, depreciation and earn some return on the capital invested, but further increases will be necessary before they furnish as high an economic return as other sectors of the economy. The government is fully aware of this and intends to make further adjustments. 40. The operation of the market as an instrument for the allocation of the factors of production is weak. The direct role of the interest rate as such is minor: most of the investment resources are allocated among regions and within broad and, in some instances, even narrow sectors by the develop- ment plans. Within these sectors the banks try to lend their funds on the basis of profitability and other economic criteria, giving top preference to early repayment of loans. Because of the distortions from the foreign exchange rate structure the pure test of profitability as between projects does not give a true economic result and an administrative attempt has to be made to try to correct for this, The distribution of national income between consumption and savings is mainly determined by federal action. - 9 - 41. Market forces are weakest in the case of land and other natural re- sources. Agricultural land can be bought and sold freely but farmers are restricted to a maximum holding of 10 hectares. Land used for commercial or industrial uses does not get charged the full economic rent. The same is true in the exploitation of natural resources. The workers in a mine, for example, with a rich vein of ore even though no more efficient, get higher wages than workers in a mine with poorer ore. This problem has been recognized bi.t not yet fully met. Financial System 42. The financial system consists of the National Bank, Investment Bank, Foreign Trade Bank, Communal Banks, and Cooperative Savings Banks. National Bank 43. The iational 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 banks; it is the banker for the government and the ultimate creator of money. It also acts as a cnmmrnial bank in lending on short- term to large enterprises. Finally, the bank is an instrument of economic and financial nnntrnl All En.in rp n n,lnt q havp .n h Tnai t.ronah it with information given as to the purpose of the payment. It audits the accounts of all enepie~ A -refonrmr ofr thep banking syste -m is at. nrpsprt. being discussed under which the functions of the National Bank would be restricted t hs fanra eta ak It handles the federal and the republics investment funds, foreign loans, ment Bank finances almost half of total new investment. It makes loans to economc enterprises for iew projects or for expansion. The Llons are uied for fixed assets and permanent working capital. 45. The bank tries to make its loans on the basis of economic criteria wutun e sector b(locatJous 0. caUpitu laid down by the govermniues in their economic plans. These sector allocations are normally broad and the -lvestment Bank has an important role in influencing the setting of these allocations based on its knowledge of the investment demands. As far as possible, its loans within the sector are given on the basis of the rela- tive real profitability of the various projects presented to it (this is sometimes difficult to ascertain because of the price distortions resuLTing from the foreign exchange system), the amount of money the sponsoring organizations are willing to put in and how speedily the enterprise is will- ing to repay the loan. Like investment bankers elsewhere, the Investment Bank also plays a continuing and important role in improving the efficiency of enterprises. For example, it insisted that the Kidricevo aluminum plant hire Pechiney as a consultant and follow its advice before it would grant any further financing. Sometimes, it insists on a reorganization of the management, etc. - 10 - 46. Generally speaking, past investments have not been wasteful because sales were assured in the fast growing domestic market. It is not possible to say whether available resources were allocated to the most productive projects and whether individual projects would be competitive on world mar- kets because of the still existing distortions in the price structure and the difficulty, if not impossibility, of computing production costs compatible with an undistorted structure. This difficulty was one of the principal rea- sons which led the government to introduce the new foreign exchange reform. Other Banks 47. The Foreign Trade Bank finances foreign trade transactions and is empowered to give medium-term exporter credits. 48. The Agricultural Bank was established at the beginning of 1959. It finances investment in aariculture senring its. funds from an alloni+.n rf the federal and republican investment funds. It works closely with the Coonerative Savings Banks which handle th ainvesment fnds of the cooer+tiv and peasant savings deposits. 49. The Communal Banks operate with the investment funds allocated to them byv thep cormmunes. They-% also -ollec deposits by enterprises . -- - individuals. They make both short and long-term credits to trading organiza- LvUm[ cve t ain sources: i intei:est, is paid by enterprises on their net worth into the General Investment Funds and inveed through the banking system. (2) Part of the profits and other taxes are allocated to investment; most of this also goes through the invest- ment mUS and the banks buo a part is invested directly by the governments. (3) A proportionate tax is levied on wages and allocated on a communal basis for housing. (4) The ploughing back of profits by enterprises and the rain- vestment of depreciation allowances as in Western countries is an important savngo ovurce. (1u- is Subject to tHe same drawbacks as in a Western coun- try - that is, it might be more economic for the funds to be used elsewhere utan in the same enterprise.) L. Personal savings, although increasing, are still very small and few data are available on them. With the recent big jump in rents there is now an inducement for people to save to build their own houses or to help con- struct cooperative apartment houses -- consequently, there should be an increase in personal savings in the future, - 11 - Maior Tnvpstmnt. Plqni1rqO Q4q Piiiinnq n-f, nin-Tr.- ncf' Tr)ta,l Genp.rnl Tm'r.q+Timnn. Piinrlo I K/ r'7 Budget Investments 33 4 WU11~J LCL 11 LU iu~ Enterprises: from - depreciation 138 18 - profits 122 260 16 34 Total 766 100 1/ Federal. Reoublic and local. Sources of Receipts of General Investment Funds, 1959 of Total Interest paid by enterprises on net worth 36 Share of profits and other taxes 38 Loan repayments and interest on loans 20 Counterpart of foreign loans and aid 16 Total 100 Territorial Basis of Investments Made. 1958 no of Total Investment Budgetary Special Fedp.ral 27 3 Republic 7 14 19 Ene_ 11 1 79 Total 100 100 100 52. Although the bulk of investment is not directly allocated by the governments, they do have an important role in providing some of the funds as "investors" and as sponsors of new projects. While most projects have to meet the economic tests of the Investment Bank, the sponsorship by governments means that there must be a greater dispersion of investment than would occur if the Investment Bank were able to finance projects without reference to any sponsorship: e.g., the most economical way to establish an automobile industry might have been to locate all the plants, assembly and suppliers in one town. Under the Yugoslav system, one town might not be able to mobilize sufficient capital to contribute as its share for an entire industry. The result rather would be that the industry would be, as it is, scattered over several towns. - 12 - Foreign Exchance and TradinL System 53. Until 1950, Yugoslavia like all Eastern European countries had a domestic price and cost structure completely out of line with external prices and with the degree of distortion varying from commodity to commodity. With the new economic system this rosition has been gradually improved but far from completely corrected. To make it possible for enterprises to buy and sell abroad, a system of differential exchange coefficients varying from corrodity to commodity was used. 54. The official exchange rate was 300 dinars per dollar. This was used as an accounting rate in foreign trae hu.had li++l sinificancnne ince onil a few minor transactions actually took place at this rate. The tourist rate was 400. and emigrant remittnrne rate Ann- otvnco on rnai tanactions nire based on the settlement rate, 632 dinars per dollar. An exchange coefficient for each commodity was ainnlied taking tg I tomnont rat n 1 The coefFi- cients on the import side varied from 1.0 to 2.5 and on the export side from 0.8 to 2-. 55 / u V - 0 4-V " J L. L JVIU U J.J-LCl t,t ±L- Ul CLU I;C LLU I-)C2y 1I..:;11b agreements as rapidly as her partner countries would permit. The principal area of trade still u.nder bilateral ca - isen thtwt asenErp where Yugoslavia experiences much the same difficulties as other countries -- it is fairy eas y to sel-l utU hardE toU fIndI commoiies to buyq 5. As mentioned earlier, in order to make the market in Yugoslavia work more effectively, a better integration of the economy with the outside world was needeu To acieve thi, the government made a major reform in the foreign exchange system, as is discussed below. - 13 - III. STPUCTURE OF THE ECONOMY 57. Yugoslavia's economy has now reached a stage of development almost equivalent to that reached by her nei-7hbor, Italy in 1950. Her natural resources are not dissimilar to those of Italy and like Italy she has her rich agricultural lands in the north-east, her main industrial area in the north-west, and her under-developed over-populated south. As the table below shows, many of the basic economic indicators for the two countries put on a comparable population basis but nine years apart are surprisingly similar. 58. Calculating Yugoslavia's national accounts in the usual manner, in 1959 her GVP would have been around 2.700-2.800 billion dinars or around 150,000 dinars per capita. This is equivalent to about (230 converted at the 632 rate. On the basis of the British pattern of consumption, the National Bank has estimated the Yugoslav per capita national income in 1959 to be eauivalent to about 4360 - or iust below the OEEC estimate of the Italian 1950 per capita GNP calculated on the basis of the average Western European nrice weights. The average Ttalian living standard in 1950, however, was undoubtedly higher than the Yugoslav standard is today becnuse of the _eater HpuponmPnt in Ttn1v of thA RArvine inriistrips nro- ducing for consumers and the smaller proportion of CNP devoted by Italy to i m7p~ -,t.TnPn+. 1959~ 1959 Annual Cutut r-lecr4c owerD_- 11 11 .L Crude steel 000 metric tons 950 1,300 Url 11nU0 Uool fabrics " 20 10 Cement 1,990 2,220 1. 1-e a V u4, -UW Sugar beet " 1,920 2,400 rV~j 4U~ . 1) 11! nr%t I fl Trucks 11 5,300 3,800 I've buz 40,uuu 5,uuu0 Autos in circulation Units 342,000 40,0UI0 Tractors on farms " 22,000 26,000 Merchant ships under construction 000 gross tons L/u 4uu imports, c.i.f. million 600 710 Exports, f.o.b. t 480 49D Foreign exchange reserves " 410 40 Txternal debt outstanding payable in foreign currency " 260 320 1/ Calculated on the basis of a pop'llation equal to Yugoslavia's in 1959. - 14 - National Accounts 59. The accompanying chart presents a schematic view of the present economy, indicating rough orders of magnitude.X Its salient features are: a) Agriculture and forestry produce 30% of the gross material prod- uct (but sunnort half of the nonulation). b) Mining and manufacturing contribute more to the gross material product than agriculture. c) Yugoslavia continues to devote a high proportion of her resources d) Although"' it is nt p+sbet tt rcs l o th4mporne4of international trade, it is clear that this activity is a vital ecnoic f-acto+r. curn wrcit ,-dr ,a nd" nn+ --v-e at the settlement rate, amount to between 20% and 23% of gross matria prokAl. VL.. Ft0U.. Ile~ 'artd show totu-L f,uua± j -L1VtU 1Jt,-dl1IU CLU aLUUfLIU 4V/O VJ. rn-L ~ i 00L product, On the usual statistical basis, this is overstated. The numerator s to large sbtu maintenance is included in invesumenu Und price iUsur- tions probably swell the value of investment goods in relation to the value of consumer goods; the denominator is too small because The gross material product excludes the value of some services rendered to consumers. Taking these factors into account, the share of gross investments in gross national product may be estimated at around 30%. 61. In general, investments have been highly productive, as evidenced by the high growth in real production, 10% per year since 1952. Froduction was aided by favorable natural resources (good hydroelectric power sites, fertile agricultural land, etc.) and an ample supply of labor. Moreover, the continu- ing effort by the government to make the economy more productive through the greater introduction of market elements and an intensive program of training has promoted production. 62. Over the last four years the structure of investments has changed markedly. An increasing portion of available investment resources has been devoted to augmenting working capital. The share of fixed investments declined. Inventories in some sectors are still inadequate but the general improvement has been an important factor in the big jump in output in the last few years. 63. The changed distribution of fixed investments between the different sectors of the economy also contributed to higher output. Particularly, the increased allocation to agriculture, together with other agricultural 1 Yugoslav national accounts, while greatly improved, still do not include the value of many "services" and are still subject to fairly large price distortions between sectors. YUGOSLAVIA SUPPLY AND USE OF RESOURCES -1959 DCDr-CAI'T l"i lO/"\CC AA A I C r FA -I l I ltT\ Uý1JPPLY USF ... .... ............................................. i .1 .- CG0VERNMENT .1i ADMINISTRATION 10% MNING AND MANUFACTURING . 410 11 CONSUMPTION 5_ 53% TOTAL > GR OSS MATERIAL SOCIAL AGRICULTURE PRODUCT AND FORESTRY - 100%- 30% TOTAL AVAIL- 123% 'lT. C.... FACILITIES AND HOUSING CONSTRUTION 5% - TRANSPORT 8% - PRODUCTION COMMERCE, CATERING, M AND TOURISM 33% IM T OF EXPORTS OF PORTO-GOODS AND SERVICES 7/1360 AND-Et.ivmGtSto20% 23% 7/13/60 ICC i IBRD - Economic Staff - 15 - measures, produced spectacular results and restored Yugoslavia's prewar position as a net exporter of foodstuffs. L Wit.h the ornat Paonomic nrogress made. more available resources were devoted to investments for social purposes, especially for housing, which had been lagingT bhindl The rate of house bilding is now about keeping up with the rate of urbanization. Little progress has been made, however, 4n meeting the ac)nmnrad need from the no+._ Ren with a sten-un of housing in the next five-year plan it is likely that housing will remain chel+ Q,J4 - "*IT - -4- -- 4 1 ------ .4k L 4'UO U I I~.~.LJL In e tm n in.4 -,wm'4- -.~ -. --'" - - - Investmentl/ Total Fixed Working Investment 1952 30.8 27.6 26.0 1.b 3.2 1953 36.5 32.1 27.5 4.6 4.4 1954 38.3 31.8 24.6 7.2 6.5 1955 37.2 32.1 23.1 9.0 5.1 1956 37.3 31.4 22.9 8.5 5.8 1957 38.8 31.6 22.8 8.8 7.1 1958 39.4 32.0 23.9 8.1 7.4 1959 40.4 32.8 23.7 9.1 7.6 12 Gross investment, including private investment and maintenance. Source: Narodna Banka. Agriculture 65. While many great problems still remain, the recent progress in agri- niiltmrp must be regarded as a major success. As mentioned earlier, the increasing industrialization has been successful in reducing the proportion of pen on the lnd to iust over one-half and the decline in the proportion is expected to continue. However, the availability of surplus labor on the InA no 111- +.n r.main for many years. 66 Agrniltural nrnAuntion stagnated until 1954/55. Beginning in 1956/5ri7 the fundamental changes in agricultural policies introduced from 1952 or began to pay or The changes were as mentioned earlier, the abandonment of the attempt to coerce the peasant into collective farms and government action nsea t- --o an inaentive n higher oroduction and making available equipment, improved seeds, fertilizer, and technical advice to make it possi- ble. These mes,UreS have resulted sine 194/55 in an increase of output of the order of around 10% per year and made Yugoslavia again an important agri- a p . e te anex on agniclture for a fuller discussion). cu!L,UrUaL ex!porJU'Ut . k100 ul1, -u-e -- _F_ _ _ -_ - 16 - Industry and Mining 67. Yost of Yugoslavia's industry has been built since the war; more than half the present capacity has come into production since 1952. The prewar level of output was reached and exceeded by 1947, led by a three- fold expansion in the production of capital goods and much more moderate increases in other sectors. There was continued expansion until 1948 followed by four years of virtual stagnation, coinciding with the break with the USSR and the general economic dislocation following that event. In 1953 expansion was resumed and output has grown rapidly since, averaging an annual rate of increase of 13% for the period 1952-59. In contrast to previous periods, the production of capital goods, industrial materials and consumer goods all have crown at about the same rate during these years. 68. Yugos1nvin's industrv refleets its uninue history. It has been built very rapidly in a country largely without industrial tradition under a govern- ment whinh h strivi-n t.n inin qPnnrnt.P rp.oinns ith widely -ontrstinP levels of income and differing traditions into a national unit. A consid- e-.rab Ipa qrt. of it. wasz buiilt. durringr a per4rio ofr nenif.p. intprnnt.inrin tp.n.-,n and it has been organized under a unique system which has been in the process 69. -Undr these c-rcurn,s tan-ces it+ not surriin that V-ugoslavas industry is (a) widely dispersed - at first for strategic reasons (threat I = . l 1.1VE~L JIV / C.1IX JU LJ L11UC:1 L PV y'±L LUL t- 1 M UIQ / F_Ct, - U by shortages of trained labor, technicians and experienced managers; and \'~U aueu JULJ '.of pr1otalew oJU±fli aujustrUien",. as unreaJ~±U1' ~ inherited from the previous period of administrative control are corrected. 70. It is argued that placing of industries in less developed areas makes economic sense because the factories are based on local raw materiaIs. How- ever, considering the location of markets and considering transport costs, it is doubtful whether there is sufficient economic justification for scme of the locations selected. This is recognized and the additional argument is made that there is a savings in investment for social overhead facilities if industry is built near the supply of labor in contrast to bringing it into the cities. Finally, the Yugoslavs point out that the need to develop the backward areas of their country is a decisive factor in the choice of industrial location. 71. The output of some plants is limited by the availability of skilled labor. In other cases efficient operation is inhibited by excess unskilled labor. The training of traditional types of engineers is proceeding rapidly and the methods of organizing them in consulting enterprises appear to make efficient use of this scarce resource. On the other hand, there is a shortage of industrial engineers for work in manufacturing plants and of course there is also a shortage of skilled managers. 72. Outside of the plants, inadequate transport and the erratic supply of materials increase costs. The emphasis given to transport development and the production of industrial materials at present should help to alle- viate this problem. The efficiency of plant operations in some cases is hampered by the variety of products manufactured in a single plant. To - 17 - some extent this is inherent in the small size of the market, but there are also indications that the autonomous organization of enterprises and the weakness of competitive pressure from other domestic producers or from abroad inhibit the greater rationalization of production. In recent years, the government has been encouraging the formation of business associations to get greater specialization within particular industries so as to cut costs and improve efficiency. This form of integration will probably grow in importance. 73. The wage system until recently consisted of a flat rate for each class of worker with what amounted to equal shares in the profits. regardless of his individual contribution. The system is being replaced by incentive systems under which extra income is related to individual effort. However, the chan:e- over to the new system is far from complete and its full effect will probably depend in part on the developmnt of rratPr cooetitive nrpssure on the in- dividual enterprises so that not only is extra effort rewarded but excess labor is reduced. 7/_ While the output of fjte t-raditinanl m4iing pout la,zn copper) has continued to grow, an important recent development has been the newdisovr:snf' oil ndnatl a gas. Oupu 1 4-~ --1, 1 009 ~11 4 tons next year or about equal to current Yugoslav consumption. The tapping prduiliztonof the natra gas is 4 just_beinning efficiency of industrial production are favorable. The Yugoslavs appear to be analyzing thteir IndustriLL prleLMS in1 pragmaticu terms1t and hanl-ingr them with vigor. They are eager to learn from whatever source can be most helpful an they are willng to experiment, when the expected results are not obtained. A large part of their output of industrial products is made under foreign -Licnse 1Uum itern European firms=/and an even larger proportion of indus- trial exports are produced under this arrangement. This borrowing of tech- nology has played a very important part in their industrial development. 76. Considering the uniqueness of the Yugoslav system of industrial organization and the changes that are being made in it, it is very difficult to foresee how it wilL develop. however, the emphasis placed on proauction, competition and cost reduction and profitability must be considered favorable for future development, Basic Services 77. The output of electric power has been increasing rapidly and there has been good progress on the construction of a comprehensive grid covering the whole country. These two factors have been important in reducing the shortages experienced in the past which were costly to industrial pro- duction. Stability of supply for normal years will probably not be assured before 1963 when more power is available and more of the grid is completed, l/ For example, Siemens (West Germany), Sulzer (Switzerland), Delle (France) and Fiat (Italy). - 18 - I.Tu Lne Uumpt uiun oL a iluet L rece,in uying 4-n 0t une ugoaneay gr4u for interchanges of power has been completed with all of her Western neighbors* A similar arrangement exists only with Hungary in Eastern Europe. (See the Annex on Electric Power for a fuller discussion.) 78. With the near saturation of the railway net at its present technical level, the railways have underway a program of dieselization and modernization of signals and communications necessary to cope with the increasing traffic. At the same time the building of two express highways, along the coast and. across the north and then south from Belgrade to tie in with the Greek roa-d system, will bring the previously isolated parts of the country into a single national market. These highways will also bring easy access to Yugoslavi. from Western Europe for goods traffic and especially tourists. (See the Annex on Transport for a fuller discussion.) Public Finance 79. As was described earlier, under the Yugoslav arrangements the bulk of investment does not pass through the government accounts. The government budgets essentially cover only current revenues and current expenditures and a portion of the "non-economic" investment. (This latter mainly includes administrative buildings.) Consequently, the Yugoslavs have followed the consistent policy of balancing their governmental budgets. The budgets generally Ret out of balance only to the extent that forecasts of revenue and expendituresprove inaccurate. 80. The Federal Government's expenditures comprise 60% of the total ex- penditures by all governmental units- The larLest part of the Federal Government's total expenditures are for defense. As a result, of total civil exrenditures hv qil overnment.al units thn Fpderal Government's share is less than half. The process of governmental decentralization has gone a. n-na wn-v 9l. ThP +-ITn~ ni-n znvnp - -r-rp i _ - r ti-< z Pw.rnI rMTr nTmp-. nr.t p turnover taxes and the tax on profits of enterprises. The republics and Communes get their receints from a unriety of sourceso the mn.qt imnnrtant of which are the personal income tax and surtax, communal turnover and land taxes, et. (SeeO able iny ttsialA)nL Money C,rr ~2. Th pobem of monetaryn +aemn whl soea diFfenti i n -Porm in Yugoslavia than in other countries are fairly similar in substance. The government sector in the last two years has been buildingui t etdpst so that it has been anti-inflationary in impact. The main problem of mone- Ua~ry sUUL..Uy II0la ti Deen L OII k. U L JjL_II CU uuu U .LU UU Lilt_ UU.A _"IV;D0 ~ ~ Business enterprises are supposed to get any borrowed long-term capital from LIU LIiVt:! UIIIVIIU DrU1A W11-LU11 SU L- : .U,5 -LLI, 11- .LU11 Lht::;_L.it± sho,± uterm credit needs are met either from the National Bank or from the other banks which can borrow from the National Bank. his arrangement, like te uriginal Federal Reserve Act, was designed to try to keep money supply expanding no faster than growth in the availability of goous. As nappens in outer ecun- tries, however, enterprises sometimes borrow short to make possible an - 29 - expansion in their permanent investment. The total resultinr demand on the central bank has caused a rapid increase in the money supply. Increase in consumer credit has also been a fqector in the 1 at fw yas but a much less r one. 83. In 1959, as a result mainly of the increase in inventories in commerce and in thp. uorking, canital -needs, inagiutr,mnyspl nrae y billion dinars or by over 20O. While the economy is still adjusting to its npw f-reer ognatn,it isc~4~~+ ~~~m --+c+ +1,4,-4c a necessary increase to provide the larger money supply needed. Quite prob- balance of payments. At any rate, the National Bank took more stringent meas- 11es to. brn r-4-- to- enterprises,-~ under conro -anhe and the other banks to refuse to expand their lending to enterprises above 61 A o4. As indicated earlier, the structure of relative prices is still being adjusted and with the new foreign exchange reform, more major changes are still to be expected. At present, in addition to the fixing of the usual public utility prices, maximum prices are also set for certain basic materials (steel, coal, cement,, basic chemical products) where there is insufficient competition to keep prices down and the products are particularly important for the rest of the economy. In a number of other products (window glass, cutlery, bicycles, refrigerators, paints, rayon, silk, shoes, etc.) enterprises are required to notify the government before price increases can be put into effect. The price increases may be forbidden if they cannot be justified on the basis of increased costs outside the control of the enterprise. Eventually with the foreign exchange reform it is expected that the latter two categories of price control can be abolished and price regulation left to internal and external competition. 85. In agricultural products, as part of the policy to encourage output, minimum guaranteed prices were set in 1957 for cereals and livestock and recently for rice and broiler chickens. The exchange reform may result in higher prices for agricultural products, but it may be too optimistic to believe that the Yugoslavs could abolish this assistance to agriculture. 86. Aside from the changes in the index due to the actions taken to reduce price distortions (rise in rents, power and transport rates) prices have been fairly stable in the last few years. Forei.,n Trade 87. The accompanving charts present the main elements of Yugoslav trade. Among the most significant points that might be mentioned are the following: a) The rapid growth of trade: exports, f.o.b., have tripled from 160 million eauivalent in 19M0 to 4Z80 million in 1PC9. Thew qre f'orr.1st. at around f'600 million in 1960. Imports, c.i.f., have increased 2 1/2 times from 290 million in 1cv)n +.n 27nn million in 1959Q - 20 - b) An important part of imports has been the large grain imports, principally from the U.S. This should vanish in the future. The growth of exports of manufactures is particularly striking. c) Since the resumption of trade with Eastern Europe in 1955, the proportion of trade with this area has generally remained below one-third of the total. It is not likely to grow beyond this proportion: "Once bitten, twice shy". Balance of Payments 88. The deficits in the balance of trade have fluctuated in a regular pattern with the biggest deficits in the odd-numbered years following on need to imnort food due to the bad harvests in the even-numbered years. With the increase in food output in Yugoslavia this pattern should no longer prevail. 89. Net earnings from invisibles have been growing fairly steadily, par- ticularly on transnortation account (hearing in mind that imnorts are valued c.i.f.). Net invisible earnings in 1959 were 147 million compared to 00.5 million in 1950. Privnte Aonations have also inreasd from A13 million to 541 million. Perhaps the most disappointing showing in the invisibles has heen in earnings from tourism, At some 106 million in 1959, the ptenial for tourist earnings has scarcely been touched. 90. Foreign exchange reserves remain very low, at around 040 million. While the governmnent hope: to raise this figure to a more comfortable leel so far the urge to invest in plant and equipment has proved stronger. In medium-term exporter credits and grant lines of credit to countries in the ardle at i eort. cptual utilzat b om i sign ifial blance ofan pes are that this export of capital will become a significant balance of payments factor ~ ithfuture. YUGOSLAVIA EXTERNAL TRADE BY MAJOR COMMODITY GROUPS (MILLIONS OF U. S. DOLLARS) 800 1 11800 70 7nn ALL OTHER-.J7 Fl F 6001.r,l 600 OTHER MANIJFACTURES~IPPQt:fl-11l 500 500 400' ------400 3001 300 wiI..rIlFUELS AN01> 2 0 0 - 20 0 100 100 GR IULTURAL PRODUCg___ '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 (Pre!m.) (P rcf m. EXTERNAL TRADE BY PRINCIPAL TRADING PARTNERS* (MILLIONS OF U.S. DOLLARS) 8001 800 EXPORTS IMPORTS 700 700 600u OTHER OVERSEAS M0 600 600 DOLLAR AREA 400 400 300 L200 200 mn200 100 100 rna. WESERN-EUROPEk 0N N EN E 0 0 m 0, vå r/A A AJ 0f '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '50 '5l '52 '53 '54 '55 '56 '57 '58 '59 *Countries of origin and destination (Prelim.) (Prelim.) 7113/60 18 RD - econoic S4.ff 1662 - 21 - IV. PROSPECTS AND CREDITWORTHINESS Economic Prospects 91. As mentioned above the pace of economic growth during the past four years was greater than was expected in 1956 when the current five-year plan was anoroved. As a result- it is exnented that the mainr onals will be reached during the current year, i.e., one year ahead of schedule. Gross Material Product at 1956 Prices (Indexes 1956 = 100) Gross Material Product 1960 Forecast 1961 Original Plan Total 157.4 154.1 Industry 161.0 166.1 11griu _LU U_UUe 150.() 7 1"1.7 Forestry 118.1 103.5 Building Trade 173.1 164.9 Transport 150.7 156.3 Commerce, hotel, tourism 172.8 146.4 Handicrafts 146.7 140.4 92. A new five-year plan for 1961-1965 has been prepared. Its objectives are based on past economic performance, current potential and future require- ments. It therefore constitutes a convenient framework for an analysis of Yugoslavials economic prospects. 93. The gross material product is expected to grow during the next five years at a rate of around 11% per annum, or on a per capita basis by around 10% per year. This is high but not out of line with previous experience: the gross material product expanded at a rate of 8.8% per annum in 1953-56 and by 12.2% in 1956-60, or by an average of 10.5% during the last eight years. Out- put available for internal use is to increase at a slightly lower rate because the deficit on current account is to be eliminated and the foreign exchange reserves built up. To achieve this growth, about 32.5% of the gross material product will be devoted to.investment as compared to 30.7% during the last four years. The overall stru?ture of investments will undergo no major changes. As a proportion of the total, investment in industry and mining will be increased while investment in transport and agriculture will be slightly smaller. Slightly more investment is to go into housing and hospitals and schools. 94. These investment targets are not likely to fail for lack of investment opportunities and lack of projects. Yugoslavia offers many profitable invest- ment onnortunities- and nroients are being brenared everywhere. Many projects under the plan are already under construction or have been started. For many otes nla-nsc andi analysesn-av beewn or are. beAing prP.narP__i The danryer rather - 22 - is that investments might exceed planned levels and available resources. To maintain the high level of investments and to imnrove the balance of nnymentsy gross savings must increase at a high rate, Of the expected increment in the gross material product between i960 and 165 around 40n s n to be saved 95. The n1anned savings efforts. olni not res nanably +o + san- dard of living., It should be possible to increase total expenditures for social amenities and consuim±nnt.inn 11 t9l-n'+.,hm~V f'471, Y'k- --- over - -- annum. 1- plan is for personal consumption expenditures to increase by over 8.8% annually or At. A rante of* 7 r r,.+o T-, ,AA44- P- -114 ---44, and social services, including housing, are scheduled to increase at a rate of -,'. J---.. s"- ~- 4'-1i W ii L~ kJ.d.I _L,)'- U U JJUI j~UU 11-UII (0 )000V U-11. UZ in 1960 to over 100,000 in 1965. School space is to be expanded by almost 50,-. oweve, wheh1 tis savnag effort is feausloe wil depend, as explaine below, on the impact of the new foreign exchange reforms on the distribution ynera 'D" 9U. e plan is essentially consistent with past development. Agriculture and those branches of industry which support agriculture continue to receive high priority; industries with export potential or producing import substitutes are to be encouraged, tourism in particular is to be encouraged; special help Is given to the development of the most backward areas. During the next five years, special. emphasis is being placed on making the economy more competitive. lo this end, the government intends to spread the new wage system; to allow more foreign competition; and to choose the projects which are most profitable, can be built in a short period of time, use domestic raw materials, and whose products are easily marketable at home and abroad. Sector Goals 97. The high rate of overall growth projected rests on high growth rates in all branches of the economy, in particular in agriculture and industry which together represent about 70% of the gross material product. Agriculture is expected to grow at a rate of approximately 7.2% per year, i.e., about 42/ over the whole period. This compares with a growth rate of 5.5% between 1953- 1956 and of 11.3% between 1957 and 1960, or an average of 8.4% during the last eight years. Uhereas the 1956-1960 plan aimed at a rapid increase in the shortest time and therefore concentrated on cereal crops, the 1961-1965 plan provides for a more balanced production. While it also expects the major part of the increase to result from crop production, it puts greater emphasis on meat production, industrial crops, fruits and vegetables, and provides for a large increase in the domestic processing of agricultural products for export. The socialized cooperative sector is expected to produce the main part of the planned increase. The targets for this sector are high and are based on a considerable increase in yields. Their fulfillment will require intense effort, but results already achieved on the best farms indicate that they are not excessive. A major effort is expected from the private farmer only for the expansion of sugar beet and meat production, and in this he can count on the assistance from the general agricultural cooperatives. The forecast for 1965 therefore appears to be within reasonable limits. - 23 - 9e. industry, including mining and energy, is expected to grow by around 13% yearly. This compares with a steady growth of 12.5% annually from 1953 to 1960. The pattern of expansion in industry differs somewhat from that of the previous period. Although all sectors are expected to grow, particular emphasis is placed on the three following areas, previously without priority: a) the production of supplies and equipment needed for agriculture (fertilizers, insecticides, agricultural machinery) and the processing of agricultural products; b) the increased production of minerals and processed forest prod- ucts (pulp, raper and paper boards); c) a general expansion of the chemical industry. 99. Many of the new enterDrises will use mainly domestic raw materials and the products of other branches such as steel and oil refining. There are also plans for a considerable nroduction expansion in cement, steel and electric power and in the mechanical industries: transport equipment and electrical machinery. 100. The nlanned qrnuth nf +.hA 1uilding industry hr byaundl 1, npr annum will receive the necessary impetus from the expanded program of house build- space is to be enlarged by 50%; an expansion which is sorely needed, since exI -col oprteo _too three shift per day and would be __su ficient to take care of the expanding educational program. Transport, trade, 's'-' ~ ~ ~ U G.LUV C ~ - ~ ~J L 0.U 0.. LWW ±-Lo./ }jc;V%i. y 0. , LC on the growth of the other sectors of the economy. Transport will benefit fromDM U larg investments in dRnq-ip-ent and new roads, which are already well underway. Tourist facilities are being expanded rapidly, their con- strU'UtII being supportedu by sjubs idiesk!. from)l Lte budgue 101. The expected progress appears to be attainable, even taking intO account that a relatively larger share of the investments will be for pro- jects with a lunger periou of gestatIon Uan previouslyo hUe planUU ex- pansion of electricity generation from 8.8 billion kwh to 17.5 kwh can be amoust entirely auneved from the capacity now under construcoon. PlaUs for increased coal output are well established, while oil and gas exploita- tion is progressing rapidly. Notable exceptions are the chemical works and food processing plants which still have to be started; most plans are, however, ready. More important, the present drive to increase the competi- tiveness of the economy should raise productivity considerably and produce large gains in output. industrial production is still hampered by shortages of raw materials and spare parts but increased agricultural production and more liberal imports of these items under the new foreign trade and exchange system should assure a more adequate supply. Labor redundancy, waste and poor labor productivity is still significant and should be curtailed by wider spread of the new wage and salary system. Many opportunities exist to increase production by small-scale investments. - 24 - 102. While a great deal of progress has been made towards integrating Yugoslavia into one national market the process is not yet complete. The improvement in rail transport, the new super highways, the better cor-munica- tions, and the completion of the high-tension power grid over the whole country during the next five years should go far towards this goal. At the same time. the increase in national income and the better integration with foreign markets should make it possible for more industrial plants to grow to the economic ontimum. These developments should continue to be an impor- tant factor in continuing the rapid economic growth in Yugoslavia. Balance of Payments 103. One of the main aims of the new five-year plan is to eliminate the definit on current aont (eclirding imnorts financed by lone-term borrovine). and to achieve a modest surplus through a considerable expansion of foreign trade. Exports of goodsl and c2exrices are ton incres 'hv 11-6 annually. i.e.. a somewhat higher rate than for the gross material product. Imports are expected. to increase by -10< inualywichis the same asnp n.th+Je ac-tual rate of the last eight years. To achieve these targets, Yugoslavia counts on a con- sidale.L increase ofL its ex ports %J.L ~ 1f~ yA ~ RfT factures(wood and copper products, some chemicals, etc.) in addition to an Exchange Reform AU4 Wnetner i0ne targets Will De auntfeveu Wi±± uUPC5u t1CLV_y 'Aun wa effects of the new exchange reform. The reform itself is a far-reaching one and to carry it through successfully will not be an easy task. The government decided to undertake the reform because the previous system of exchange coefficients was hampering the operation of the market mechanism. As more decisions were coming to be made in the light of market prices it became necessary to have more reliable prices to guide investment decisions and the allocation of resources. The objective of the reform is to bring the structure of prices in Yugoslavia into harmony with those of the world economy. 105. Under the new exchange regime all transactions are to be effected at the new rate of 750 dinars per U.S. dollar and all multiple rates arising from the old exchange coefficients are eliminated, (with the possible exce tion of a special tourist rate which is to be a transitional measure only ) .on o a 106. The effect of the reform on particular exports and imports will depend on the relation between the new rate and the old coefficient, Where the effect will be unfavorable certain transitional measures will be insti- tuted to ease the adjustment. Many exports, principally foodstuffs and raw materials will benefit by the reform and may show some tendency to increase. On the other hand, exports of manufactured products will gener- ally be unfavorably affected. In some cases it may be possible to squeeze profit margins in order to maintain exports but for the more difficult cases the government proposes to provide export assistance which will be gradually reduced over the next few years. - 25 - 107. Imports will be subjected to a new customs tariff. On the import side the effect of the new exchange and tariff rates will also differ according to the category of imports. However, the new rates will not play the same impor- tant role as in the case of exuorts. since imnorts were snbict to r.triAtionn under the previous regime and some restrictions will be maintained. The effect of the reform on total imnorts will thus nnend not only on +he cnnes in the price of imports but also on the restrictiveness with which the direct controls are administered. For Pyamnl the imnt ons of ponnimer gnood ray be decreased slightly whereas the cost of importing capital goods may be increased Sip nific_antly_ NPvPer+hA.lP_z- it, chkn,iA hkamhl +^ n+i +Im A mand AfP_ capital goods with a less restrictive control system than before so that the totAl A{ffpn-. it nv 0f liealztin T-de itA is hope th_At U-4- the- imports of capital equipment will exert a downward pressure on the prices of r1nnPes.t-c equiprmennt despit the - high 4-tarif to which- th mprs r sbjet nA~ The introduction of t --- --e- e xhneQl(ear-.luuoaly~ forUcastsUz of the balance of payments virtually impossible. However, keeping in mind that ts contnud ou ruw by ov 7o yearly even during the uifcult period of 1952-1956, that exports will be aided by the government, that some export ouse have UmpAe room to lower their prices and that new exports are bound to emerge, it seems reasonable to expect that exports will have expanded markedly by 1965. Imports should remain within limits. To relieve tne imme- diate strain on the balance of payments, the government may also decide to postpone some of the least urgent investment projects. In the long run, how- ever, these reforms should considerably strengthen the Yugoslav economy and the balance of payments. 109. The increases in agricultural output, unfortunately, are not likely to result in comparable increases in agricultural exports because of the difficulties in finding markets abroad. The building of the European Common Market and the European Free Trade area blocs may make Yugoslavia's hopes of increased exports to these countries more difficult. She has been cultivat- ing markets in the underdeveloped countries of the world and may have to rely still more on them. Her proposed foreign exchange reform should help her make more progress in securing non-discriminatory treatment from the members of GATT -- most of whom do not give her the full benefit of the tariff concessions made to other members. 110. Based on past experience Yugoslavia should secure a considerable inflow of economic assistance from the West during the next five years. Reparations and similar payments will total about $25 million. U.S. surplus commodity sales (cotton, coking coal) and DLF loans may run at around $4,0-45 million a year or a total of $200-220 million. Of total exporter credits of 200 million granted to Yugoslavia at the end of 1959, $125 million was still unutilized. There were also $21 million of loans from Western governments unused,, - 26 - External Debt 111. Yugoslavia borrowed quite heavily abroad during the 1920's. By 1929, of export earnings and net invisibles. With the onset of the Great Depression, ex-rt erning v cr -p,red oh-ly T"- 1011' +,-+01 Anj1k+ OnTvr4f%4 All ITM c,il7n_ lent to around 50% of total export earnings. In fact, Yugoslavia went into - r i f~.U~ - - " " . -j kjAL~~y ii~~. L-VCLLt.±L Ljwj. about 15% of her export and net invisible earnings. With the Axis invasion ..L J A- , uurini:,;'. uh- _U Z:i.JU 'UjLWL Yul-ju r iilt iv U U11u uiu U1a - l prewar debts except one; the Danube-Save-Adriatic Railway debt which was inherited from the Eustro-nungarian Empire. NegotiaTions 1or a settlemen of this debt are still proceeding. Some of the settlements, amounting in total to a prewar capital amount of $27.) million are temporary; a final settlement is to be negotiated before 1965. 113. Yugoslavia has also reached agreements on all of its obligations oni foreign-owned nationalized properties: over $125 million of the agreed compensation has already been paid. A balance of $25 million remains out- standing and is included in the figures of external debt which follow. 114. The total external debt outstanding on December 31, 1959 totalled $385 million. Of this, $323 million was payable in Western currencies and $62 million in commodity deliveries to the Soviet bloc countries. Servicing this latter should presumably give rise to little difficulty. Yugoslavia owed $50.4 million on three IBFR loans, originally totalling $60.7 million, granted between 1949 and 1953. Exporter credits outstanding amounted to $75 million. There was a short-term credit of $3.5 million by the BIS, while the remaining debts were loans from other governments. A further $157 million of external debt, mostly export credits had been contracted but undisbursed at the end of 1959. In addition, $290 million equivalent was payable in dinars to the U.S. Government from sales of surplus agricul- tural commodities and DLF loans. 115. The additional borrowing amounting to about $275 million which is being undertaken in connection with the exchange reform clearly constitutes a substantial addition to the present debt. The precise terms of all the credits making up the total have not been finally determined but a large part. probably over 60%. will be medium-term. Hence, total Yugoslav debt service will be quite heavy over the next few years; it may amount to an order of magnitude of $100 million per year or about 15%1 of total foreign exchange earnings, until 1966, after which it would decline very sharply. Creditworthiness 116. Since the Bank's last loan in 1953, Yugoslaviats foreign exchange earningS lina n1rn+_ t.Prpe wileI t!he externa debtrPve inc,1li-ng t.he new exchange reform credits, has somewhat more than doubled. More important, the general economic and which a ben achieved inhec intht ea has created a much stronger economy and there is every prospect that economic growih ll ± onJ. 4-JiULLALJ 6 - 27 - 117. Debt service over the next five or six years will be fairly high and the ease or difficulty of servicing it will depend on a number of different factors including the amount of foreign assistance which may be received in the future, the success of the economy in achieving the goals of the new five-year plan and the ability of the Yugoslav system to adjust to the new exchange rate. The management of the balance of payments under the new exchange system will constitute a challenging task for Yugoslav economic policy. In the recent nast. however- thp Ynioslav Government has demonstrated its willingness and ability to make drastic adjustments when necessary and there are therefore good aroind for nnnfidenn that dcisive action will be taken to meet the problems which the future may bring. YUGOSLAVIA SERVICE ON EXTERNAL PUBLIC DEBT AS OF DECEMBER 31,1959 (MiLLiONS OF U.S. DOLLÄR EQUIVALENTS) 100! 1 11100 PATABLt. IN CUMMUUI T T DELIVERIES TO SOVIET BLOC 0 40 20 20 KAAAAxx Asexxexxx &44xx64x4Äxxxxxx xxxx b xx& x 1951 1955 1960 1965 1970 1974 DEBT SERVICE RATIOS (PER CENT) 30 30 201 t1\420 TOTAL SERVICE ON TOTAL EXTERNAL DE8T, INCLUDING COMMODITIES REPAYABLE DEBT, AS.PERCENT OF TOTAL EXPORTS + NET INVISIBLES + PRIVATE DONATIONS 10 10 1951 1955 1960 1965 1970 1974 7/13/60 ou1 IBRO-EconomiC Staff 么 J UL丫！960 ISRD7--
Группа Всемирного банка · Pre-2003 Economic or Sector Report
Yugoslavia - The economy (Vol. 1 of 5) : Main report
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