The Change in the Yugoslav Economic System

A study of the Yugoslav economic situation and system was undertaken by a Fund Staff Mission which visited Yugoslavia between September 26 and November 12, 1951. This paper is a revised version of part of the mission’s report presented to the Executive Board of the Fund. The mission’s visit coincided with the beginning of the transition period in Yugoslavia from the old to the new economic system, characterized by the most intensive changes in economic organization. These changes could not be closely followed and appraised from Washington. However, the available information indicates that Yugoslavia, at least until the middle of 1952, did not deviate from the basic philosophy of the new economic system. This paper may therefore claim to present correctly the meaning of the changes and the broad lines of the intended new economic organization.

Abstract

A study of the Yugoslav economic situation and system was undertaken by a Fund Staff Mission which visited Yugoslavia between September 26 and November 12, 1951. This paper is a revised version of part of the mission’s report presented to the Executive Board of the Fund. The mission’s visit coincided with the beginning of the transition period in Yugoslavia from the old to the new economic system, characterized by the most intensive changes in economic organization. These changes could not be closely followed and appraised from Washington. However, the available information indicates that Yugoslavia, at least until the middle of 1952, did not deviate from the basic philosophy of the new economic system. This paper may therefore claim to present correctly the meaning of the changes and the broad lines of the intended new economic organization.

J. V. Mladek, E. Sturc, and M. R. Wyczalkowski *

Basic Meaning of the Change

WHEN AFTER THE WAR a new regime was established in Yugoslavia by the Communist party, it accepted Soviet economic techniques for the achievement of its social and economic goals. This was natural, as the U.S.S.R. was the one country where it could be maintained that Marxist principles were already in operation. For practical purposes other denominations of the communist creed did not matter. The Soviet model of the Marxist economic system and the Soviet techniques were assumed to be the best, simply because they were the only ones in existence.

There are some indications that, as soon as the first enthusiasm for Soviet economic techniques cooled off, the Yugoslavs came to the conclusion that in certain respects they could have done better. According to the Yugoslavs, disagreement on economic concepts was one of the reasons for the rift with Cominform countries. Certainly, when the rift came, Yugoslav political and economic leaders openly manifested their lack of confidence in the master economic system of the Soviet type, and having embarked on criticism of the system they inevitably had to criticize also their own economic organization. They found it deficient, wasteful, and incapable of promoting social progress, and eventually rejected it with the same vigor with which they had accepted it a few years earlier.

The Yugoslav economic and political leaders are determined that the new economic system being introduced in Yugoslavia should not depart from the Marxist concepts of social and economic development. In the minds of its designers, the new system is not a recession from communist doctrine. Marx, they claim, did not present a blueprint to show how the socialist system (representing the transition stage in the necessary development toward communism) was to function. The Soviet Union did not discover any such blueprint either and, in fact, according to the Yugoslavs, the organization of its economy involves a denial of basic Marxist principles. As for the present, the more correct interpretation, in their view, is the new Yugoslav system.

Basically, Marxism remains the common creed of the Soviet Union and of Yugoslavia. At least two of the elements present in all countries in the Soviet bloc are maintained in Yugoslavia: the Communist party’s monopoly of political leadership and the emphasis on collective ownership of the means of production. However, the Yugoslavs are less inclined in their interpretation of Marxist teachings to accept or create unchangeable dogmas, and the methods by which communist goals are to be attained are different under the new system in Yugoslavia from those employed by the Soviet system. Possibly the most important difference is in the significance attributed to the state. In the Soviet Union, the state assumes an all-important role for achieving communist social and economic goals. The lives and economic activity of Soviet citizens are subjected to a very high degree of detailed regulation. The Yugoslavs call the Soviet system “caste capitalism,” meaning control by a caste of omnipotent bureaucrats. In Yugoslavia there seems to be much less confidence than in the Soviet Union in the omnipotent government and in its ability to bring about the metamorphosis of the economic man into an altruistic being. In the new Yugoslav system the state will have a less significant role. Administrative functions are to be decentralized, and initiative in economic and social policy, to a large extent, shifted to individual enterprises ; as supervisory authorities, the organs of local government seem to have gained in importance at the expense of the central government. Parallel to the decrease in the preponderance of the state, there is a tendency to assure more freedom of action to individuals, and to show more confidence in individual initiative and in man’s capacity to develop in conditions that are less regimented than in the U.S.S.R.

In the sphere of economics the most important difference between the Soviet approach and the Yugoslav approach is that, while Soviet leaders seem to have completely ignored economic principles and economic automatism, substituting for it the conscious planning of almost every detail of economic life, the Yugoslavs recognize the usefulness of a certain automatism in economic development, which in the regulation of economic life cannot be completely replaced by planning. Therefore, while in the U.S.S.R. there is no climate for the development of any objective economic thinking, such a climate may be created in Yugoslavia.

The elimination from Yugoslavia of xenophobia of the Soviet type also makes progress in this respect easier. The Soviet Union has closed its frontiers to all foreign influences, and restricted not only the travel of its people but also the penetration of ideas from abroad, because of the continuous fear that the population might become infected by western ideas. The Yugoslavs seem more sure of themselves and less worried that they will lose the purity of their communist principles through contact with western ideas. They claim that their system must combine the advantages of the capitalist economic organization and of the Marxist doctrine. In this they seem to remember Marx’s praise for the efficiency of capitalist organization.

The changes now contemplated in Yugoslavia mean not only the introduction of a new and rather experimental economic system which in many respects is reminiscent of some of the earlier writings on “free” socialism; they may also be considered as evidence of the artificiality of Soviet thinking and Soviet ideology on the one hand, and of the strength of noninstitutional economic laws on the other.

Working of the Soviet Economic Model in Yugoslavia 1

Planning of production

At the time of the break in relations between Yugoslavia and the Soviet bloc, the movement toward establishing a Soviet economic system had gone further in Yugoslavia than in any other member of the Soviet bloc, except the U.S.S.R. itself. Any remaining differences between the Yugoslav and Soviet systems were believed to be only temporary and were expected to disappear as soon as conditions warranted. The main difference was that, while in the U.S.S.R. agriculture was (with insignificant exceptions) collectivized, in Yugoslavia more than 75 per cent of the cultivated land was (and still is) in the hands of private farmers.

By the summer of 1948 the management of the Yugoslav economy had become completely centralized and was undertaken by a huge administrative apparatus. From the early months of 1947 the whole economic activity of the country was determined by plans, which were elaborated in the form of a Five-Year Plan. This Five-Year Plan was more strictly defined by annual plans, which were further subdivided into rigid quarterly plans, and, if there had been no break with the U.S.S.R., five-year plans might have been expected to follow each other, as in the Soviet Union.

The Plan regulated the activity of each enterprise in a detailed way. It established the output and prices of all primary agents of production, regulated their allocation, and set the volume of production for each enterprise. Deviations from the planned figures were, in practice, unavoidable. Such deviations were welcomed when they meant an overfulfillment of the Plan, while underfulfillments were deplored.

Regulation of the volume and the commodity composition of agricultural production was much more difficult than that of industrial production, because of the importance of natural conditions and of the predominantly private ownership of land. However, by means of sowing plans enforced in villages and compulsory collection of agricultural produce, the Government to a significant extent influenced the commodity composition of both crops and animal production.

Cost and price formation

Under this system the market principle was almost completely ignored in the formation of prices. There were no prices for those agents of production which can be summarized under the general term “nature,” and a price for capital, i.e., an interest rate, was also largely absent. This was a consequence of the Marxian doctrine that the only source of value is labor.

Where labor is regarded as the only source of value, the monetary expression of value, i.e., the prices of goods, ought to depend on money wages and on the quantity of labor used. As in the Soviet Union, such a method of pricing was never used, since it is impossible to apply it in practice. Nevertheless, one feature of the labor theory of value was used in determining the prices at which enterprises sold their produce. These prices (cost plus established profits) were determined by supply conditions alone, while demand was not permitted to exercise any influence.

The prices of raw materials were established on the basis of planned current cost of production, the elements of which were also fixed (prices of materials were fixed strictly and wages within certain ranges), plus an arbitrarily set amortization of existing capital, plus a markup for profits defined as a percentage of costs. The demand and supply of any producers’ goods in short supply were not adjusted by increasing their price above average production costs plus a rigidly fixed markup for profits, but by an arbitrary reduction by the planning authorities of the quantities requested by individual enterprises in their original detailed “plans,” which served as one of the bases of the total plan. If an enterprise included, for example, three plants, each with different conditions of production, and therefore different costs of production, the price at which the enterprise had to sell its produce was not equal to the marginal cost, or to the average cost of the marginal plant, but to the average of the costs of production of all three plants. This led to the formation of different prices for the same goods in different parts of the country, though these prices were to a great extent equalized by central selling organizations.

The same method of cost and price calculation was applied to finished goods and consumers’ goods. However, in the formation of prices of consumers’ goods another element was added—the turnover tax, which in the case of producers’ goods was either absent or without any significance. Turnover taxes, imposed on the producer at the moment of sale of consumers’ goods (or of such producers’ goods as were purchased by the public) to the wholesaler, and varying from commodity to commodity, significantly increased the prices of such goods.

Most industrial consumers’ goods were distributed to the population within the rationing system at prices calculated in this manner (or sometimes at prices which were below costs of production). The remainder were sold at “commercial” prices, which were approximately free market prices. As a result of the abundance of purchasing power in relation to the total value of goods calculated at low (ration) prices, commercial prices were several times higher than the prices of rationed goods.

Agricultural goods were also dealt in at two price levels. The prices of industrial crops and of all commodities compulsorily collected by the state were fixed by the state and delivered at these prices to processing enterprises or distributed to the population in the form of low-priced rations. The balance of marketable surpluses was sold by farmers in the free market, where prices, for the same reason as for commercial prices of industrial goods, were much higher than those fixed for obligatory deliveries.

Under such a system prices were deprived of their normal function as an indicator of what should be produced and in what quantities, and of what combinations of factors of production should be used. Although this system of cost and price formation represented only a stage toward the system which in the Soviet economic model is considered normal, it was not to be expected that even in the final stage these deficiencies would be eliminated.

Under the Soviet economic system the situation is considered normal when there is no rationing and only one prevailing price for each consumer commodity. But even in such a situation, consumers can scarcely influence the composition of the consumers’ goods supplied, and certainly not the commodity composition of producers’ goods, which depends exclusively on the decision of the planners. If consumers’ goods are in short supply, the turnover tax rate is adjusted and quantities produced are very seldom changed.

Distribution of the national income

In the Soviet-type system of planning, prices were a tool of distribution policy, rather than a factor influencing production, and the commodity composition of production was fixed by administrative means. The Government could, within broad limits, arbitrarily establish the division of the national income into consumption and investment. In order to do so, it had to determine the amounts of investment and of consumers’ goods to be produced, and to coordinate the output so established with investment construction plans and with the total demand for consumers’ goods. In achieving the administratively set conditions of equilibrium, the Government had at its disposal the powerful tools of a complete control of credit and financial policy and of the turnover tax, rationing, and sales at high commercial prices.

Credits for financing current production were granted according to a credit plan which was supposed to be strictly adjusted to the production plan, while investments were financed mostly by the state budget in the form of grants (and to a small extent directly out of the profits of enterprises and by credits). Thus credits and grants were made subject to the physical plan of production; they were not supposed to exert any active influence on the composition of production, and served only as instruments of the so-called “dinar control” of the fulfillment of the production plan.

Equality between supply and demand for consumers’ goods was supposed to be assured by turnover taxes. By changing these taxes and correspondingly changing the production and the credit plans, the Government could mould the production of investment and of consumers’ goods.

In practice, the “dinar control” proved to be ineffective. Credits were granted to producers either upon the sale of finished goods, although the goods might have been unacceptable to the purchaser, or for financing production, irrespective of actual results. The expansion of credit meant that there was continually more purchasing power than the value of consumers’ goods at fixed prices. To absorb the excess purchasing power the Government had to increase the volume of goods sold at commercial prices at the expense of supplies sold at low fixed prices. However, even this was insufficient and a black market developed. Thus, in effect, investments were financed partly through forced savings.

The system of planning and of price formation enabled the Government not only to establish the division of the national income between investment and consumption but also to regulate the distribution among various groups of the population of that part of the national income allocated to consumption. The main example was the favoring of the city population at the expense of private farmers.

The prices paid for compulsory deliveries of agricultural produce were much below the level to which the pressure of the purchasing power of the city population would have raised them. On the other hand, goods which farmers traditionally desired were scarce because industrial production of consumers’ goods was directed mostly to the satisfaction of the needs of the urban population. Therefore, farmers could obtain many of the goods which they needed only in limited quantities or at very high prices. In order to increase their purchases of these goods, they had to sell in the free markets in the cities part of the limited surplus of agricultural produce left after the fulfillment of compulsory deliveries. The result was that the farmers’ standard of living was much lower in comparison with that of the urban population than if there had been no compulsory deliveries. This does not necessarily mean that the farmers’ terms of trade deteriorated from those of the prewar period. The deterioration was definite only in comparison with such terms of trade as would have existed if there had been no government intervention. It might have been expected that the terms of trade would otherwise have been much more favorable for farmers, because after the war about 900,000 people went from villages to cities (Which caused an approximate 25 per cent increase in city population) or to the sites of development projects, while agricultural production did not increase. The policy of limiting the purchasing power of the village population was consciously adopted by the Yugoslav Government in order to assure to the urban population the standard of living considered necessary for industrialization and also in order to create agricultural surpluses for export, which in turn again served mostly the purposes of industrialization. Later the increase in the standing army made this policy still more necessary.

The organization of foreign trade

Under the postwar Yugoslav economic system foreign trade was a state monopoly. Foreign trade transactions were carried out by organizations which specialized in certain lines of exports and imports, and acted as agencies of the Ministry of Foreign Trade.

The economic plan provided for a certain total value of exports and imports in conformity with the production and investment plan and with the requirements of the balance of payments. The plan specified the commodity composition of exports and imports, although, especially for exports, there were frequent deviations from the plan because of the changing availability of goods and of changing conditions in foreign markets. Exports and imports were assigned to individual enterprises, except agricultural exports, which were assigned to collection centers for agricultural produce. In conformity with the plan, individual enterprises and collection centers were required to deliver specified quantities of specified goods at established dates to the specialized foreign trade organizations, or to places established by such organizations. Foreign trade organizations delivered export goods to foreign countries in accordance with trade agreements concluded by the Ministry of Foreign Trade, imported goods specified first by the plan and then by the foreign trade agreements, and delivered such goods to domestic enterprises and distributive organizations.

The meaning of the exchange rate

The pricing system that had been adopted made it inevitable that domestic prices should be independent of those in foreign markets. If the commodity composition of Yugoslav exports and imports had been determined by the internal price structure and by foreign prices (i.e., if the goods imported were those that, calculated at a uniform exchange rate, were more expensive in Yugoslavia than abroad, and the goods exported were less expensive in Yugoslavia than abroad), the commodity composition of imports and exports would certainly not have been in conformity with the central plan. But since it had to be in conformity with the preference scales of the Yugoslav central planning authorities, it was likely to be different from that indicated by relative prices in Yugoslavia and abroad. The plans of industrialization and of production were in physical terms, and prices were disregarded as an indicator of economic decisions. In particular, the relative prices of exported and imported commodities had to be disregarded in order that exports and imports should fit the scales of preference of the Yugoslav planner.

If, under these conditions, a uniform exchange rate had been applied to all export and import transactions, the dinar prices thus obtained would have deviated considerably from the official fixed prices. Certain exporters and importers would have suffered losses, which would have had to be covered by the state budget, while other exporters and importers would have had extra profits.

Under a price system of this Soviet type, it was necessary to adopt methods for foreign trade transactions in which a uniform exchange rate would not be applied. In fact, no exchange rate was applied to foreign trade transactions. Foreign trade organizations purchased from domestic producers or from collection centers goods destined for export, paying for them the domestic prices established by the state; and they exported the goods thus obtained and sold them in foreign markets at the highest possible prices. The foreign exchange obtained was delivered to the National Bank of Yugoslavia at the official exchange rate. In order to import goods, foreign trade organizations which specialized in imports purchased foreign exchange also at the official rate (mostly in the form of clearing accounts abroad). These organizations bought goods in foreign markets at the prices prevailing there, and imported them to sell to domestic enterprises or organizations at domestic prices. The difficulty of pricing imports of goods which were not produced in Yugoslavia, and therefore had no domestic price, was solved by making a comparison with the nearest substitute and then establishing a price. Transactions between foreign exporters and importers and the Yugoslav specialized foreign trade organizations were settled in foreign currencies, and transactions between Yugoslav foreign trade organizations and Yugoslav suppliers or purchasers of exported or imported goods, in dinars. No explicit exchange rate was used and implicit exchange rates, of necessity, were multiple. The extra profits and losses of producing enterprises and of agencies collecting farm products were thus eliminated as a disturbing factor in foreign trade transactions. The balance of such profits and losses appeared as a total loss or profit (in practice it was always a loss) in the dinar accounts of the foreign trade organizations, and were then transferred to the state budget.

The official exchange rate was, indeed, not completely irrelevant. Foreign diplomats, tourists, travelers, and also Yugoslav travelers abroad, as well as foreign remitters and domestic recipients of remittances, bought or sold foreign exchange at the official rate. The rate was, however, of no interest to Yugoslav domestic producers, to purchasers of imported goods, or to foreign importers and exporters. It was neither a link between the Yugoslav economy and the world market, nor an intermediary whereby foreign prices and Yugoslav prices influenced each other.

Aftermath of Soviet-Type System and Other Economic Conditions

Legacy of the Soviet economic organization

The transition from the Soviet type to the new economic system is being carried out under difficult circumstances, which to a large extent determine the method, timing, and duration of the transition. These circumstances have their origin partly in the previous Soviet type of organization itself and partly in extraneous events. Except for the drought of 1950, the causes of all the other difficulties are economically or politically interrelated and none of the difficulties can be ascribed to any single cause.

The fact that the Soviet type of economic organization was already in operation made difficult any speedy transition to a new economy based essentially on the market principle. When the decision to introduce the new system was made, the Yugoslav Government found that there was no well-established orientation point on which to base adjustments in economic magnitudes of a kind that would clear the ground for the limited operation of market forces.

The Yugoslav leaders wished to abandon the Soviet system as soon as possible, since, as they themselves stated, “every day of its existence brought losses to the Yugoslav economy.” On the other hand, immediate economic social and defense requirements and the aftermath of the period during which the Soviet economic organization had operated made it impossible to abandon all controls and to allow at once all economic magnitudes to find their appropriate market relations.

The investment plan

During the first postwar years there was a substantial recovery from the severe devastation of the war. The resources absorbed in reconstruction were considerable. The strain on the economy was, however, not diminished even after two years of rehabilitation, for in 1947 a Five-Year Plan was launched. The Five-Year Plan was not merely a program for the rapid and extensive industrialization of an overwhelmingly agricultural country. It also aimed at equalizing the widely divergent economic and social levels of the various parts of the country. The economic, social, and cultural differences between the advanced republics, Serbia, Croatia, and Slovenia, and the economically backward regions of Montenegro, Macedonia, Bosnia and Herzogovina, which resulted from the different historical developments of these regions, required that particular emphasis should be placed on the location of investment projects, and, accordingly, disproportionately large investments were planned for the backward regions. As it was in practice impossible to maintain different rationing standards for different parts of the country, and equally impossible to impose the low consumption levels of certain regions upon other regions whose standard of living was higher, rationing in fact raised the consumption standards of some regions above the prewar level, and total consumption therefore tended to increase. An important part of the Plan was also devoted to social investments, mainly in housing, office buildings, schools, student dormitories, theaters, etc., which were to absorb some 20 per cent of the total planned investment outlay.

Investments were begun on a broad front, probably too broad for them to be carried out even with considerable foreign aid. Yugoslavia hoped that such help would be forthcoming from her eastern political allies. This expectation was not entirely fulfilled, however, since no aid in the form of unrequited exports was provided by these allies. Some valuable supplies were received during the first two years of the Plan, and were paid for by Yugoslav exports consisting in part of goods which it would have been difficult to place in other markets.

The heavy investment program resulted in large population shifts. By May 1948 employment in industry was 64 per cent higher than in 1946, when industrial employment already exceeded the prewar level. This meant a substantial increase in the demand for consumption goods. According to government estimates, the supply of consumers’ goods was adequate to sustain an average level of consumption some 6 per cent higher than before the war. Agricultural reform, which shifted farmers from the extremely poor sections of the country and increased the numbers operating on cooperative farms, raised the consumption of the farming population as a whole, and diminished their marketable surpluses.

The conflict of 1948 completely shattered the basis of the foreign contribution to the Yugoslav investment program. By 1950 all trade relations between Yugoslavia and the Cominform countries had ceased. The progress of the reconstruction program was blocked by failures in deliveries, and the expectation of early returns from investment turned out to be deceptive. The split with the Cominform countries made it necessary to find new sources of long-term credit and new export outlets to replace those on which it had previously counted.

Despite these difficulties, the Government at first decided, for reasons which it regarded as decisive, to continue the Five-Year Plan essentially as originally conceived. The target for investments in 1949, originally planned at 88 billion dinars, was reduced to 80 billion dinars, and the emphasis of the Plan shifted slightly in favor of industries whose expansion would make possible some early relief from balance of payments difficulties, e.g., forestry and the mining of non-ferrous metals. Only late in the second half of 1949 was it decided, without a substantial departure from the original targets of the Plan, to prolong the period of its execution to six years. By allowing certain already existing capital equipment (in both industry and agriculture, but especially in housing) to run down, by a considerable utilization of foreign exchange facilities, and by allowing monetary reserves to fall well below the safety margin, the Government was able in 1949 to make new investments to the value of 68.4 billion dinars.

The catastrophic drought of 1950 brought increased difficulties, and in the latter half of the year the Government decided to reconsider the objectives and to undertake a far-reaching revision of the Plan. The main emphasis of the new “key investment program” was on the establishment, as soon as possible, of a balance in Yugoslav international payments at a higher level of trade; on projects that would produce in the shortest possible time the largest volume of finished goods; and on the expansion of projects that would eliminate bottlenecks, i.e., mainly the development of fuel and power industries and some transportation facilities.

The political split with the Soviet bloc entailed a realization of the danger of military aggression so that, to the investment and social expenditures, were added the still more insistent claims of defense upon the country’s economic resources. In 1949 national defense already absorbed some 14.5 per cent of all available resources, and since then the proportion has become greater. The Yugoslav authorities claim that, to a large extent, the defense requirements limited the possibility of reducing the investment plan. They also influenced the structure of the reduced “key investment program.”

The balance of payments

The successful fufillment of the original Five-Year Plan was considered dependent upon the possibility of financing a balance of payments deficit of about $400 million over the period of the Plan, and at the same time maintaining a high level of external trade. However, the Plan overestimated the strength and flexibility of the machinery of economic controls; hence, it overestimated the volume of goods that the central collecting agencies could divert from domestic uses to exports. Moreover, it did not take fully into account the fundamental changes in consumption levels to be brought about by the execution of the Plan. The expansion of the urban population and the agricultural reform increased the domestic consumption of the agricultural goods which had traditionally been the largest group in Yugoslav exports. 2 Had these two factors been fully realized, it would have become apparent (no matter what terms of trade expectations the Government might have had) that a balance of payments deficit of some $400 million would not have been sufficient to enable the country to carry out the full original Plan.

Export receipts were rising, but they did not keep pace with payment needs. In 1947 (when large UNRRA aid and reparation shipments were entering the country) the Government had to break into its monetary reserves (estimated at the end of 1946 to be about $80 million) to meet its current obligations.

The sudden break with its eastern European neighbors placed the Yugoslav economy, in view of the rigidity of the system within which it operated, under a most severe strain. The investment activity could be continued only if the capital goods could be secured from other parts of the world on a loan basis, since exports even of the 1948 volume would not have been sufficient to pay for the import needs. In view of the commodity structure of its exports—disregarding the time element involved in establishing new commercial contacts extensive enough to absorb 50 per cent of the previous volume of exports—Yugoslavia could not have expected to place in western markets (confined as they were at that time by severe exchange and quantitative restrictions on nonessential goods) any large part of the goods previously sold to eastern European countries.

Despite all efforts, the foreign exchange proceeds from exports fell from $302.2 million in 1948 to $192.3 million in 1949, or by 36.3 per cent. At the same time, the Government was able to decrease the value of imports by only about 8 per cent, from $315.7 million in 1948 to $291.4 million in 1949. It was hoped that, if the investment plan was revised, and its finance secured on a long-term basis, the deficit on current account incurred during 1950 would be relatively small. Two factors, however, emerged in 1950 that made the desperate balance of payments situation even worse. Political events in that year caused the Government to increase its expenditures on the armed forces, and a catastrophic drought destroyed the prospects of improving the level of exports in comparison with 1949. Instead of expanding, exports in 1950 dropped 18 per cent below the 1949 level to $158 million. Despite further decreases in investments, due to the growing needs of the army and to the consequences of the 1950 drought, exports during 1951 did not reach the 1949 level, though they were nearly 16 per cent greater than in 1950.

While export proceeds were low, imports could not be restricted too much as army needs were increasing. Only at the cost of serious internal disturbances in production and consumption was the Government able to cut imports by $59.8 million, or by about 20 per cent, to $231.6 million in 1950. In 1951, the expansion of aid under an agreement with the United States, the United Kingdom, and France permitted an increase of imports of about 15 per cent. As the import needs of the army were greater in 1951 than in 1950, there could be no further significant increase in imports destined for investment or civilian consumption.

In view of the low level of export proceeds and in order to finance its import needs, the Government had to increase indebtedness further, despite considerable relief aid from the United States on a grant basis that covered some two thirds of the current deficit during 1950. By August 1950, Yugoslav indebtedness abroad had increased to $180 million, of which a substantial amount was repayable on short term.

In the process of revising the investment plan, it was realized that the capital goods imports necessary to implement the new limited program would still amount to about $200-$225 million. As the balance of payments effects of these investments would start to appear only in 1954, it was further realized that the country would continue to run large balance of payments deficits to cover the current import needs of the economy and of the expanding army.

In view of these facts and in order to help Yugoslavia to protect its independence and at the same time enable her to borrow the means that would permit the expansion of productive capacity, the Governments of the United States, the United Kingdom, and France entered into negotiations with the Yugoslav Government to find a solution to the problem of its current balance of payments deficit. The outcome of these negotiations was that the three Governments undertook to help to finance the deficit of Yugoslavia on current account (except for imports of capital goods necessary for the implementation of the investment program) during 1951, with the expressed intention of continuing such aid in 1952.

The inflation

Inflation is apparently an indispensable aspect of the working of the Soviet economic model. Even in the U.S.S.R. itself, where the model is claimed to be perfected to a higher degree than in other countries of the Soviet bloc, inflation appears to be periodically accumulating.

In Yugoslavia, the reconstruction and the development plan, the rapid and large increase in the city population, agricultural reform, and a high degree of equalization of money incomes throughout the country at a higher level than the previous average, resulted very early in serious inflationary pressures. Although, according to government estimates, the supply of consumers’ goods was greater than before the war, the money supply increased still more rapidly. The inflation was intensified when the supply of consumers’ goods was reduced by the consequences of the “blockade” of Yugoslavia by the Cominform countries, of increased defense requirements, and of the 1950 drought. In 1950, while the supply of consumers’ goods was severely reduced, the total wage bill was 11 per cent higher than in 1949.

The Government was unwilling to increase ration prices as a means of absorbing excess purchasing power, and instead widened the scope of the hitherto narrow peasant market, on which farmers were permitted to sell their produce provided that compulsory delivery quotas had been fulfilled. Later, certain categories of industrial consumers’ goods were made available at high “commercial” ceiling prices on the “free market,” without the surrender of ration cards. According to official estimates, about 10 per cent of all consumers’ goods reaching the market during 1948 were sold at these high prices on the “free market.” The relation between the prices of rationed quantities of consumers’ goods and “free market” prices of the same goods may be illustrated by the fact that in 1949 consumers spent on the free market about 40 per cent of their income and obtained from it only 10 per cent of total purchases of consumers’ goods. The proportion of the total supply of such goods sold on the “free market” was gradually being increased.

Distorted prices

The inflation further distorted the already complicated and peculiar price structure inherited from the period during which the Soviet economic organization was in operation. For the purpose of analysis, prices under the old Yugoslav system could be divided into two groups: prices in the sphere of production, and prices at which the population purchased (mostly consumers’) goods. The first category of prices was used for producers’ goods in industry, for the calculation of costs, and in transactions between producing enterprises and, after the addition of turnover taxes, for the producing enterprises selling finished goods destined for wholesalers and consumers. The prices at which farmers sold their compulsory deliveries to the state should also be included in this category.

Prices of the second category—those directly relevant to consumers—were diversified. The population (mostly urban) received rations at very low prices, but could purchase from farmers certain amounts of goods at free market prices and other goods (mostly industrial) from state stores at “commercial prices,” which approximately corresponded to free market prices.

Since the break with the Cominform, changes in prices have been concentrated chiefly in the second category. In the first category, changes have been comparatively minor (mostly upward) for prices applied in industry; they have been pronounced in only the food-processing industry, because of the removal of most of the obligatory deliveries of farm produce, and as a result of increases in prices paid for the obligatory deliveries that remain—wheat, corn, and fats. In agriculture, the changes have been great, as a result of the removal of obligatory deliveries, and the scope of low-controlled prices has consequently significantly decreased.

The New Economic System

Yugoslav approach to the new system

The new Yugoslav economic system has to function within the framework of general social and political requirements as determined by the Marxist doctrine and by the country’s present economic structure. Work on blueprints for this system has been going on almost since the break with the Cominform. All its main features have been worked out and agreed upon, but they have not yet been put fully into operation. Certain principles have been established only in general terms and some important details are still being discussed. Moreover, the authors of the new system have deliberately left many details for future consideration and decision. They realize that only a trial period for the new system will indicate what additional rules may have to be introduced or what mistakes there may be in concepts which so far have been prepared in an academic way. Since the new system is, to a large extent, based on the market principle, it may be assumed that it will contain a series of self-correcting forces.

In view of these considerations, the present discussion of the Yugoslav economic system must be regarded as the discussion of a system whose establishment is desired but is still far from complete. The Yugoslavs are convinced that in general it will prove an efficient system, and they are strongly determined to put it into operation. However, certain modifications, perhaps even major modifications, may be introduced in the transition period. On the other hand, certain features of the new system have already been introduced, and it is difficult to imagine that the development of the new system could be stopped.

Prices and wages

The outstanding characteristic of the new economic system is the acceptance of the market principle. Prices of consumers’ goods and of producers’ goods will be essentially market prices. The principle that prices of consumers’ goods will be freely determined in the market does not imply that there will be no government intervention in their formation. For example, consideration has been given to the possibility of a uniform price of bread throughout the country in spite of regional differences in the cost of production of bread grains and in transportation costs. Prices of certain consumers’ goods and of other goods directly bought by the population will also be influenced by various kinds of state intervention motivated by both economic and social reasons. Nevertheless, prices will not be planned; they will only be subject to government intervention and this only in certain cases.

The prices of agents of production will, in principle, be freely formed in the market. However, the authors of the new system expect that the prices of key raw materials will have to be regulated, at least in the initial stages. If prices of certain key raw materials, mostly of military importance, are regulated by the state, they will also have to be allocated to producing enterprises according to some administrative principle, and to that extent the market principle will be distorted, as indeed it is at present in many capitalist countries.

In contrast with the practice of the Soviet Union, the agent of production, capital, will also have its price; interest rates have already been reintroduced in the Yugoslav economy. Statements by the Yugoslav authorities suggest, however, that the formation of the interest rate is likely to be under government influence.

Great changes are planned in the system of wages and salaries. The Soviet concept of wages has been rejected, but the formation of wages will be different from that of capitalist countries. The earnings of workers and salaried persons are to be paid in the form of money. Under the previous system, an important part of their remuneration was given in the form of services free of charge or at prices much below cost. Under the new system, the volume of services thus distributed will be drastically curtailed. Workers and salary earners will have to pay full housing rents, pay contributions to their social and health insurance, and pay for tuition in schools. The consumption of electricity, gas, and transportation will not be subsidized by the Government. This will enable workers to widen the area within which they can freely choose what to buy and how to spend their earnings, and will put the production of services on a sounder economic basis.

The earnings of those employed in enterprises are to be composed of two parts: permanent wages and variable wages. Permanent wages, 3 which will vary according to the skill, education, and responsibilities of workers and employees, are to be established by state regulation and represent the minimum wages which workers and salary earners in producing enterprises must receive, even if they are unemployed for reasons other than their own choice. Permanent wages, however, will not be unchangeable. A so-called “fund of permanent wages” is to be established for each enterprise, on the basis of certain estimates of total employment in the enterprise. 4 If the enterprise or its management succeeds in reducing the number of employees, the permanent wage fund will remain unchanged, so that per capita permanent wages will increase. Similarly, if the number of workers is increased above the standard level of employment, per capita permanent wages will fall, within certain limits.

Variable wages are to be paid out of profits. In November 1951 the Yugoslav authorities thought such “wages” would represent as much as 30-40 per cent of total earnings. 5 They are supposed to be distributed according to a schedule, which, as for permanent wages, depends on qualifications, experience, and responsibility. A certain part of variable wages is to be distributed in the form of premia for outstanding performance.

The allocation to wages of a large share in the profits of enterprises will not necessarily make total earnings of workers and employees larger than they would have been under a capitalist wage* system, for the diversion of part of profits to wages is achieved by cutting down what in the strict sense of the word would be regarded as wages in a capitalist economy and by converting it into a share of profits.

The authors of the new system consider that, in order to create work incentives, and incentives for improving the standard of education, there has to be a considerably greater differentiation of individual earnings. Toward the end of 1951 the highest earnings in industry were about four times the lowest earnings. It is intended to apply the principle of differentiation also to wages and salaries in institutions and in the government administration, where, as in the capitalist countries and, for that matter, in the U.S.S.R., there is nothing corresponding to “variable” wages.

The Yugoslav Government intends that the part of earnings which are in the form of family allowances will continue to be financed by the Government. Salaries and wages, therefore, will be paid irrespective of the size of the family, so that compensation for performance and position may be the only consideration in determining them.

Position of the consumer

The position of the consumer in the new economic system will, in principle, be the same as in a free capitalist economy but, in practice, it will be affected by state policy, as in capitalist countries, but probably to a larger degree. Certain parts of the profits of enterprises will be put aside for special funds, from which collective expenditures will be financed for housing projects, nurseries, libraries, etc., for the workers and employees of a particular enterprise.

Since the formation of prices of both consumers’ and producers’ goods will be based on the market principle, it follows that under the new economic system “consumers’ sovereignty” will prevail. Consumers’ preferences, expressed through the market prices of consumers’ goods, will be transmitted to producers via the system of prices in that market; in response to the price indications thus given, producers will change the composition of production of consumers’ goods. Consumers will decide how much of their earnings they will save and how much they will consume, but “consumers’ sovereignty” over the allocation of national income as a whole between consumption and investment will be limited, as indeed it is in most capitalist countries, where, however, the responsibility for such over-all decisions is not concentrated in the hands of the Government to anything like the extent required by the Yugoslav system.

Organization of enterprises

The “independent enterprise” is the backbone of the new Yugoslav economic system. It is to be a profit-making institution, most usefully to be compared to a cooperative where all employed are members, or to a joint stock company whose shares belong to the employees and whose profits affect salaries and wages directly. An enterprise will usually be composed of one plant. This differs from the practice in the U.S.S.R., where enterprises are in most cases composed of several plants, especially when plants are small and belong to the same branch of industry. However, in certain cases Yugoslav enterprises will be composed of more than one plant, especially when the main plant has a number of subsidiaries.

The Government will not interfere with the current performance of an enterprise, but will establish general rules and regulations for all enterprises and exercise a general, though infrequent, control over the fulfillment of those rules, and over books for tax purposes.

The administration, i.e., the governments of the republics which exercise certain powers defined by their respective parliaments, will establish minimum contributions (out of net profits, before taxes): to an obligatory minimum investment fund, and that part of profits which is to be distributed among workers and employees. It will also determine the so-called “social contributions,” i.e., government shares in net profits of enterprises, or, in other words, profit taxes.

Enterprises are owned by the state, but will be administered as a quasi-trusteeship by the workers and employees within the framework of the general rules described above. All the workers and employees of an enterprise will elect once a year a “social council,” of approximately one third of all workers and employees. The social council will then elect a managing group called an “administration board,” as well as the manager of the enterprise and his deputies. The manager and his deputies will belong ex officio to the administration board. Neither the members of the social council nor of the administration board will be remunerated for their services on the council or board. All members must be employed in the enterprise and have duties connected with its normal functions. Special regulations insure that in factories which employ mostly workers the majority of members of the council and of the board should also be workers.

The social council, within the general framework established by the labor union, will decide on the distribution of that part of profits which may be used for variable wages, on the distribution of premia, on the utilization of special funds for investments (above the obligatory minimum investment fund), on housing, etc. The administration board will be responsible for the current work of the enterprise, appoint specialists for higher jobs on the recommendation of the manager, and decide the commodity composition of production and the selling policy of the enterprise. The functions of the manager thus appear to be quite limited. However, this is not the intention of the new system. The manager is supposed to be free to make technological and business decisions, such as marketing and purchases of materials. If there is disagreement between the manager and the board of administration, the manager may still proceed according to his decision until the matter is settled either by the social council, if the problem falls under its jurisdiction, or by the state administrative authorities, if there is a question of interpretation of state rules and regulations, or if it concerns taxes, the minimum investment plan, etc.

Individual enterprises may be members of associations organized separately in each republic, with advisory functions. These associations will serve as a platform for the exchange of ideas, and will publish recommendations on the organization of labor, technological processes of production, distribution of incentive premia, etc. They will also coordinate the investment activities of individual enterprises, but only by means of recommendations. Associations are not to become trusts or concerns, and membership is not compulsory. For example, in Serbia, the interested groups decided that the functions of associations may be successfully performed by existing institutions which organize inquiries into the work of enterprises and publish the results, and that associations are not necessary.

Equilibrium of an individual enterprise

From the principle of market prices for agents of production, it follows that each enterprise will have an opportunity to buy the most advantageous combination of agents of production and at the most advantageous prices under conditions of competition. Both technological decisions affecting the combination of agents of production and economic decisions based on consideration of the prices of both agents of production and finished products will be taken by the managements of individual enterprises, and the Government will not interfere with these decisions.

It appears, therefore, that under the new Yugoslav economic system the equilibrium of an individual enterprise is to be attained in the same way, and will be established at the same point and with the same volume of production, as in a free capitalist system. However, the wage system to be adopted in Yugoslavia makes it possible that equilibrium will be established at some different point. The real difference between a Yugoslav enterprise and an enterprise in a capitalist economy, and especially, an enterprise of the kind normally discussed in terms of the theoretical economic model, is that, while the entrepreneur in a private capitalist economy is motivated in his decisions mostly by maximization of profits, there is in the Yugoslav enterprise no individual entrepreneur, the function of entrepreneurship being entrusted instead to the personnel of the enterprise. Workers and employees, however, are not entrepreneurs in the full sense of the word, since they draw their incomes not only from profits but also from permanent (“minimum”) wages. Their decisions will be motivated by the desire to maximize individual or per capita earnings. Under such a system the equilibrium point of an individual enterprise may be attained at a volume of production different from that established in an identical enterprise under the theoretical model conditions of a capitalist economy. Even in a capitalist economy an individual enterprise does not as a rule establish the volume of production exactly according to the principles of the theoretical model.

Theoretical analysis based on the information now available does not permit any definite conclusion as to whether the volume of production of an individual enterprise under the new economic system will be below or above the economic optimum. The actual performance of Yugoslav enterprises may be judged only when the new system is put into operation.

A more important question is whether the new wage system will be acceptable to workers and employees, and whether it will prove sound and efficient. When workers and employees become shareholders, they also become risk bearers, to the extent of their “variable” wages. Since the work of enterprises is to be based on the market principle, it is inevitable that certain enterprises or whole branches of industry will sometimes suffer from more or less prolonged sectional depressions, and at other times enjoy market booms. This will necessarily cause variations in the earnings of workers and employees. Such variations may be eliminated by various means, but this would mean the abandonment of the principle that workers are something more than hired labor. The question remains, therefore, whether workers prefer security or a chance of somewhat higher earnings combined with some measure of entrepreneurial risk. The Yugoslavs believe that the new system will create in the workers a feeling of attachment to the enterprises run by them, and of responsibility for the performance of the enterprises.

The problem of workers’ shares in profits is not new. It has been intermittently discussed for more than a century and no satisfactory solution has yet been found. But the lack of a solution by no means proves that the concept is wrong. Yugoslavia has now entered an experimental path which, if followed too hastily, might lead to serious losses. The Yugoslavs, however, do not appear to approach their new concepts in a doctrinaire spirit, and they may be expected to take advantage of the transition period to make such corrections as experience shows to be necessary.

Equilibrium of an industry

Since all individual enterprises will compete for agents of production in a free market, a tendency is to be expected toward equality in the profits of enterprises and of the various branches of industry. Enterprises with exceptionally high profits will expand production, or new enterprises will be built in the same industry from investment funds accumulated there or from funds provided by banks out of corporate and private savings.

The market principle requires that unhealthy enterprises should be eliminated, and the Yugoslavs consider it necessary to reintroduce the institution of bankruptcy for individual enterprises. This concept does not seem to have been completely worked out. If the bad performance of an enterprise is the result of incompetent management and the negligence of workers, the defaulted obligations will probably have to be paid out of accumulated funds (but not from the minimum investment fund) at the expense of all the workers and employees. If difficulties are the result of a permanent change in demand, workers would have to be subsidized until they found new employment, the enterprise being liquidated, either gradually or at once.

Agriculture

The intention of the Government and of the Communist party of Yugoslavia is to proceed with the collectivization of agriculture. Voluntary collectivization is stressed. The difficulty is that in order to attract peasants to collectives, they must be given certain privileges (lower tax rates, deliveries of fertilizers and implements at lower prices, etc.), which result in a smaller agricultural marketable surplus. If, on the other hand, collectivization were to be pursued by forceful methods, production would decrease and there would again be smaller marketable surpluses.

By the middle of 1952 all farms, whether private or collective, had been freed from the obligation to deliver agricultural produce (except raw wool) to the state at prices established by the Government, and were permitted to sell their produce and buy other goods on the free market. It is thus intended that agriculture also should work according to market principles. It may be expected, however, that prices both of agricultural goods and possibly of the most important goods bought by farmers will be influenced by government policy aiming at a desired distribution of the national income. The system of wages in the collective farms is similar to that in industrial and commercial enterprises. Wages are no longer paid in kind, and any goods produced on the farm which farm workers need have to be purchased by them at the farm “stores.”

Finance and banking

In the organization and structure of public finance in Yugoslavia, two trends may be observed: decentralization and a decrease in the scope of government budgets.

Under the decentralization program, the budgets of the republics and local budgets will cease to be integrated within the federal budget. The federal budget will be responsible only for federal taxes and federal expenditures. The budgets of the republics will be carried out independently of the federal budget, on the basis of decisions by the parliaments and governments of the republics. Subsidies to the budgets of certain republics will have to continue, and the surpluses of the budgets of other republics will, therefore, have to be paid into the federal budget, but on a much smaller scale than under the old system.

Under the old system, which in this respect is still in operation, the budget (mostly federal) was a collection center for almost all the profits of enterprises, all taxes, revenues (practically gross) of insurance, and loans subscribed by the population. It financed almost the whole investment program, the losses of state enterprises and of foreign trade organizations, and the expenditures (practically gross) of insurance. Under the new system, the scope of the budget will be greatly reduced for investment financing and, therefore, the collection of investment funds will be almost completely withdrawn from it. Investments will be financed mostly by enterprises and by banks, the federal budget retaining, however, the financing of purely defense investments. The scope of the budget will be further reduced by the elimination from it of insurance, the losses of enterprises (except in unusual cases), and many gross entries under both revenue and expenditure. Taxes on wage and salary earners will appear as a new fiscal feature. This becomes necessary because earnings will not be regulated by the state and no upper limit is imposed on them.

Banks, under the old system, were instruments for the execution and control of production and investment plans. Under the new system, also, they will remain under strong government control and the National Bank of Yugoslavia will be the only source of short-term credit. The controls will, however, be primarily instruments of general economic policy and not of strict administrative planning.

The State Investment Bank and the State Bank for Financing Agricultural Cooperatives have recently been incorporated in the National Bank of Yugoslavia, which thus became, with the exception of local cooperative savings institutions, the only bank in the country. However, new banks may be created, e.g., by certain branches of industry, and there may thus be some decentralization and specialization of banking. Banks and their branches will collect investment funds and all the permanent funds of enterprises, and will pay interest on such deposits. From these resources, banks will make long- and short-term loans, for which interest will be charged.

The method of granting credits will be completely changed. They are to be based on creditworthiness rather than determined by a government plan. Within the limits of the rules laid down by the state, banking policy will be established by boards, whose members will be recruited from various sectors of the economy. Each board will advise the manager of the bank in matters of credit policy, which will, however, be rather strongly influenced by the Government.

Although the interest rate will be influenced by the Government (the Government may also establish different interest rates in order to favor certain projects), it will approximately correspond to market conditions, since the intention is to set interest rates at a level that will assure equilibrium between the supply of capital and the demand for it.

Planning and automatism

Under a system based on the market principle, the scope for planning is inevitably much narrower than under the old system. A symptom of this change has been the abolition of the Central Planning Commission, which used to be the most powerful instrument for the bureaucratic management of the economy.

One feature of the old system of planning—the presentation of daily, weekly, fortnightly, monthly, quarterly, and annual reports on the performance of enterprises to many controlling agencies, banks, planning commissions, local governments, republican governments, and the federal government—has been abolished. Enterprises will, however, be obliged to present an analysis of their situation when applying for credits; they also have to present annual balance sheets to branch associations, to banks from which they obtain credits, and to republican governments.

The state will influence economic policy through the enforcement of general policy measures rather than in the form of planning. To a large extent, plans will have to be replaced by estimates of the activity of various sectors of the economy. For example, under the limited market principle, financial planning will be substantially reduced, as in capitalist competitive economies, to estimates of revenue from taxation and other sources.

The importance of planning (as distinct from economic policy measures) will be greatest in the field of investment. It may be assumed that future governments will continue a policy of industrialization. On the other hand, workers and employees can scarcely be expected, under a system where the accumulation of private wealth is strictly limited, to be eager to enlarge their enterprises at the expense of, for example, their housing facilities. To assure the desired size of investments, the Government may regulate the minimum obligatory investment funds in enterprises, increase income taxes, and limit the real earnings of the population by means of sales taxes. Investments may also be planned to ensure the direction of investment funds to desired projects.

The discarding of the concept of an omnipotent plan will widen the scope of the automatism of economic laws. Self-correcting forces will emerge and the managers of enterprises will be provided with indicators of action. The actual performance of the new economic system may, however, suffer for some time, especially in comparison with countries with a long tradition of entrepreneurship, from the lack of experienced managers. While bearing this in mind, the Yugoslavs believe that in the long run lack of skill and experience will be a much less important limiting factor than it was under the old system, which seemed to postulate an almost superhuman competence on the part of the planners.

The Transition

The timetable

The Yugoslav Government decided to introduce the new system by stages, and to survey the economic situation at each stage in order to make necessary corrections and to decide how soon it would be feasible to pass over to the next stage. Such an approach, indicating a cautiousness which is found to be necessary in view of the experimental features of the new system, makes it impossible to construct, at the present, a detailed timetable of the changes.

It is nevertheless certain that, because of its nature, the new system may be considered to be in operation only after production is brought through the price mechanism into full contact with demand. Therefore, the unification of the existing multiple price levels is a most important prerequisite of all other internal changes. As long as there are multiple price levels, with all the unknowns that this entails, the new system of wages and of investments (above the minimum obligatory investment fund) by enterprises cannot be adopted in full.

Even after the unification of widely divergent price levels, the Yugoslav Government will not be able, and in fact it does not intend, immediately to introduce fully the principle of free decisions as a basis for the functioning of enterprises. 6 Wages, both permanent (“minimum”) and variable, will have to be frozen for a certain time by the state, workers will have limited freedom in distributing profits, and managers of enterprises will continue to be appointed by the Government. 7 Only after the system settles down will new principles of distribution of profits be put into force, and only when workers and employees of enterprises learn more about how to run enterprises will they appoint managers.

The transition also involves difficult financial problems. Turnover taxes will be abolished as a main source of budgetary revenues and taxes on (variable) wages and on profits (“social contributions”) will be introduced instead.

Therefore, it seems necessary that the unification of price levels should precede the introduction of the other elements of the new system, although in certain spheres they may be put into operation before the final unification of prices—if such unification is achieved gradually.

Unification of price levels

The price situation that existed toward the end of 1951 was already a result of certain steps taken in accordance with the policy of unification. However, the Government did not want an early complete unification. First of all, in view of the inflationary pressures, and later also of the drought, it would not have been possible to maintain unified prices at a stable level. Secondly, although the Yugoslavs very soon came to the conclusion that the economic system had to be changed, they were not yet ready with the concept of a new system. Therefore, the unification had to be postponed until it could be combined with the introduction of a new system. A complete unification would have involved changes in wages and, therefore, costs of production. But the principles of the working of enterprises had to be changed too—in a direction that was still unknown. Therefore, the old system and elements of cost calculation—unsatisfactory as they were—had to be temporarily preserved so that the whole productive apparatus would not be hampered by too many uncertainties. On the other hand, the maintenance of a system under which rationing proved to be costly, inefficient, and of receding importance, while the scope of the market with free prices was increasing, could only increase the complications existing in the Yugoslav economy.

The Yugoslav authorities found an ingenious temporary solution for the problem. While in industry costs continued to be calculated as before, i.e., on the basis of unchanged wages and prices of other agents of production, in the distribution apparatus free market prices were extended to all consumers’ goods (but not to services). The method used for the achievement of this purpose was as follows.

Ration cards were gradually replaced in 1950 by so-called coupons which were issued to wage and salary earners in two forms: industrial commodity coupons and foodstuff coupons. These coupons were denominated in currency and, apart from the limitation that each category could be used only in the sector indicated by the name of the coupon, they could be used freely for any commodity chosen by their owner. A recipient of such coupons was entitled to receive an 80 per cent discount on the price of consumers’ goods, so that he was buying such goods at 20 per cent of the free list price. To illustrate: When the free market price of a yard of fabric was 1,000 dinars, he could buy it for 200 dinars upon the surrender of 200 industrial coupons. For a food coupon he could buy foodstuffs at the same discount rate. At the time of introduction of the coupons, the “20 per cent” price approximately corresponded to the prices at which rations were previously allotted to consumers.

At the same time the coupons introduced earlier for farmers started to be issued in larger quantities for the voluntary deliveries of agricultural produce at low prices (corresponding to the prices of obligatory deliveries). These entitled the farmers to a 65 per cent discount in their purchases of industrial goods.

Coupons were issued in quantities which varied according to the importance of the position of the salary or wage earner but were mainly related to the size of his family. They were paid out not by the employers but by the National Bank of Yugoslavia. Therefore, they did not influence costs of production which continued to be calculated as before. Consumers’ goods were delivered by producers to trade enterprises at high prices, close to the retail list free market prices, leaving the necessary margin for costs of distribution and for profits. However, industrial enterprises were not allowed to retain the difference between the cost prices and free prices, but surrendered it automatically to a “Reimbursement Fund” created for this purpose with the National Bank of Yugoslavia. Trade enterprises sold goods partly at high prices and partly against coupons at “20 per cent” or “35 per cent” prices. The latter transactions involved a money loss for the trade enterprises, but such loss was covered by the “Reimbursement Fund.”

The abolition of rationing and the introduction of coupons permitted the formation of prices of consumers’ goods on the basis of free market principles, within certain limitations. The sale of goods by trading enterprises at “20 per cent” or “35 per cent” prices was not a direct limiting factor since the difference between such prices and high “100 per cent” prices was covered by the “Reimbursement Fund.” The application of the free market principle was limited, however, by the fact that the high free market prices in state stores were regulated list prices which responded to the demand only after certain delays. Prices were formed absolutely freely only in town markets where farmers sold the marketable surpluses of their produce. An indication of the different degrees of freedom of price formation in such markets and in state stores was the sporadic differences in the prices of identical goods (e.g., sugar) sold in these markets.

The introduction of the free market principle in the formation of the prices of consumers’ goods, even though with some limitations, permitted prices to be a means by which demand could be adjusted to current supply. A change in supply results in a corresponding change in high free market prices and, therefore, also of “20 per cent” and “35 per cent” prices. Such a market mechanism and the increase in the volume of consumers’ goods sold at high prices, from about 10 per cent of the total volume of such goods at the end of 1948 to about 40 per cent in September 1951 and probably about 55-60 per cent in November 1951, represented an activation of the suppressed inflation.

The level of unification of price levels

The abundant supply of money in relation to the low-controlled prices and the size of the wage bill in relation to the current stream of consumers’ goods excluded the possibility of the unification of prices at the level either of “20 per cent” prices or of the prices existing in the production system. The accumulated cash balances in the hands of certain groups of the population, the inconvenience of a prolonged deflation, and also purely technical considerations were the main reasons why the Government was not inclined to unify prices at some average level corresponding to the existing supply of money and of goods. The Government decided instead to unify price levels close to the upper level of prices of consumers’ goods, though prices were reduced a little from the peak level of the summer of 1951 by increased supplies of goods and by some limited deflationary measures.

The gradual reduction of rations and the increased scope of the “free market” were an early expression of this policy. A further step was taken on November 1, 1951, when the issue of food coupons was discontinued and the former recipients of such coupons were compensated in dinars (four times the value of the “20 per cent” price of foodstuffs). Food coupons were withdrawn from certain groups of the population without compensation in dinars, so that total purchasing power decreased even though the prices of certain goods, such as textiles, cigarettes, and sugar, were reduced.

Another step toward the “monetization” of coupons was taken in early June 1952, when coupons distributed to farmers, and entitling them to purchase industrial goods at a 65 per cent discount, were discontinued. At the same time, compulsory deliveries of farm products (except raw wool) at low-controlled prices were abolished.

The intention of the Government is gradually to “monetize” all coupons. Also, within its over-all price policy, an increase in the prices of services is planned so as to make them correspond to the future unified price level of goods. In October 1951 transportation fares and electricity and gas charges were significantly increased, though they are not yet in line with the free market prices of consumers’ goods. Labor unions have resisted the policy of increasing the prices of services (especially rents), and the outcome of the argument cannot be foreseen.

The unification of price levels and cost of production

Price unification will be complete when all coupons have been monetized and included in the wage bill, as an element of cost calculation. Cost of production will thereby be increased, and the cost structure and cost level will be brought into closer relation with the free market prices of consumers’ goods. It is not known how far this policy has been carried out. When food coupons were removed in November 1951, their money equivalent continued to be paid by the “Reimbursement Fund” and did not burden the cost of production. In the middle of 1952 there were indications that costs had been increased by at least a part of the money equivalent of coupons.

In tackling the problem of price unification, the Yugoslav Government was aware that to leave the prices of agents of production to market forces, without some preliminary administrative aid, would probably create chaos. It was decided, therefore, that new prices would be introduced by government regulation. For finished goods, the existing market prices were to remain operative. In November 1951 the intention of the Government was that the prices of semifinished products and raw materials should be established by a backward projection of the then existing free market prices of finished goods into the prices of the semifinished products and raw materials from which they had been produced, and by comparison with foreign prices by means of the new rate of exchange. Such prices should serve their purpose in the first stage of cost unification, with the expectation that later changes would not have to be very large.

The System of Foreign Trade and the Exchange Rate 8

The foreign trade monopoly was abolished, at least nominally, as early as the middle of 1951. Foreign trade transactions are conducted by authorized individual state enterprises or their associations, by associations for the export of agricultural goods, and by special foreign trade enterprises. In future, foreign trade transactions will be based on price considerations and not on orders issued by the Government in the form of a plan. It appears that substantial importance is already being given to price considerations, but direct planning has not yet been completely eliminated.

It follows, therefore, that in the final stage of the introduction of the new economic system in Yugoslavia the exchange rate should fulfill the requirements usually expected from it in countries with market economies. It should resume its functions with respect to exports and imports, and continue to be effective for travel and remittances. Thus, it will represent a real link between the Yugoslav and foreign economies.

Even before the completion of the unification of the price structure, the Yugoslav Government decided that the exchange rate should begin to be an active element in the economy and should constitute a link, even though to a temporarily limited extent, between Yugoslav and foreign prices. As there were no other established magnitudes in the economy which could serve as an orientation point in relation to which market processes could be developed, the Government decided to attach such functions to the new par value. The new par value introduced on January 1, 1952 was chosen so as to correspond approximately to the expected level of the unified cost and price structure.

While there are necessarily certain limitations, in the transition period, on the functions of the rate of exchange, it should play an important part in getting the new system under way. As explained in preceding sections, there had been no genuine economic prices for raw materials in Yugoslavia; all imported goods reached the producing enterprises at artificial, low, fixed prices, and there was a wide gap between costs of production and the high prices in the retail market. The adjustment of money wages is one major step in lifting costs closer to the free market level; the raising of raw material prices is another. In this latter respect, a realistic rate of exchange is indispensable if raw material prices in Yugoslavia are to be related to prices in world markets.

According to the intentions of the Yugoslav Government expressed in November 1951, the limitations imposed during the transition period on the functions of the rate of exchange would be essentially of two kinds: in the first place, the rate may for some time be a less decisive factor—from the point of view of enterprises—than after the transition period, because the Government would probably not immediately allow enterprises full freedom to act exclusively on price considerations in deciding on exports and imports. It would be more prudent to grant freedom of decision gradually in order to avoid damage to trade. Furthermore, even after the transition period, the direct influence of the authorities on the import side is likely to remain for a number of goods in the form of import controls and restrictions.

Secondly, the price distortions that still exist, and the correction of which requires time, make it unreasonable to expect that in the transition period the rate of exchange can be applied directly to all foreign trade transactions. If under such conditions the new exchange rate were applied directly to all foreign trade transactions, certain exports and imports would be too expensive. On the other hand, exports and imports of other commodities would bring extra profits. In order to prevent a considerable drop in foreign trade, the Government would have to cover all losses on foreign trade transactions, while extra profits would tend to be dissipated and inflate the Yugoslav economy.

In view of these considerations, the Yugoslav Government decided as a temporary measure to create an equalization mechanism. It was intended that under such a mechanism some exports and imports would receive premia, while taxes would be charged on other exports and imports so as to permit the largest volume of foreign trade transactions and to eliminate both losses to the state and the danger of inflation. It was further intended that the equalization mechanism should be applied to the smallest possible number of commodities and the smallest possible volume of exports and imports, and that gradually, parallel to the unification of prices and the strengthening of the new cost and price structure, the taxes and subsidies would be eliminated. When the process had been completed, the exchange rate would represent a full link between Yugoslav and foreign prices. 9

*

Mr. Mladek, Acting Director of the European and North American Department, is a graduate of the Masaryk University in Czechoslovakia. He was connected with Czechoslovak industrial concerns and later was Director of the Currency and Banking Department in the Ministry of Finance and Executive Director of the National Bank of Czechoslovakia. During the war he was a delegate to various international conferences, including Bretton Woods. He served in the Fund as Executive Director until 1948.

Mr. Sturc, Assistant Director of the European and North American Department, is a graduate of the University of Bratislava and the University of Chicago. He was formerly Deputy Director of the Czechoslovak Government Information Service in the United States, and a member of the Czechoslovak delegation to the Bretton Woods and San Francisco Conferences.

Mr. Wyczalkowski, Chief of the Central and Eastern European Division, was educated at the Academy of Commerce, Warsaw, and the London School of Economics. He was formerly deputy Professor and deputy Rector of the Academy of Commerce, Warsaw, and Director of the Research Department of the National Bank of Poland. He is the author of Money in the Capitalist System and in Planned Economy, Vol. I, and Economic Institutions of the United Nations, both in Polish.

1

The working of this model in the U.S.S.R. is more fully analyzed in “The Soviet Price System and the Ruble Exchange Rate,” by Marcin R. Wyczalkowski, Staff Papers, Vol. I, pp. 203-23 (September 1950).

2

A similar decrease in the possibilities of agricultural exports is characteristic of all the Eastern European members of the Soviet bloc.

3

Permanent wages are now officially described as “minimum wages.”

4

In the wage funds now operating there is no distinction between permanent (“minimum”) and variable wages.

5

The present share in total wage earnings of earnings paid out of profits is not known.

6

By the middle of 1952, enterprises were, however, reported to be almost completely free.

7

The reorganization is reported to have reached by the middle of 1952 the stage where managers were elected by the employees of an enterprise.

8

The new change in the exchange system in Yugoslavia introduced on July 1, 1952 has not been taken into account in this article.

9

In fulfillment of this program the Yugoslav Government introduced on January 1, 1952, i.e., simultaneously with the establishment of the new par value, a number of coefficients to be applied to the parity rate, varying according to groups of exports and imports. Although this meant explicit multiple rates, such a system represents progress in comparison to the previously existing system where there were almost as many implicit rates as there were trade transactions.