YUGOSLAVIA is a federal state in which there are four levels of government: Federation, Republics, Districts, and Communes. In this political organism, the main economic functions are exercised by the Federation and by the Communes.


YUGOSLAVIA is a federal state in which there are four levels of government: Federation, Republics, Districts, and Communes. In this political organism, the main economic functions are exercised by the Federation and by the Communes.

YUGOSLAVIA is a federal state in which there are four levels of government: Federation, Republics, Districts, and Communes. In this political organism, the main economic functions are exercised by the Federation and by the Communes.

The Yugoslav economic system has many features that differentiate it both from the collectivist economies of the Soviet pattern and from the more or less capitalistic economies of the West, with their varying combinations of private and public initiative in the economic sphere. In the early part of the postwar period, Yugoslavia ran its economic affairs on the Soviet model, with public ownership and state management in industry and trade, with collective farms and compulsory deliveries in agriculture, with prices of all sorts fixed by authority, and with detailed central planning not only of investment but also of the current operation of enterprises. Since 1950, a transition has been taking place toward a much freer type of economy which, while it retains public ownership of all but the smallest enterprises in industry and trade, affords a greatly increased scope for the initiative of consumers, farmers, and enterprises, whose activities are increasingly coordinated through the market mechanism.

By now, central economic planning, operating mainly through measures of fiscal and credit policy—including long-term investment credits—and decreasingly through direct intervention, is largely confined to determining or influencing (1) the allocation of national resources between saving and consumption, (2) the geographical and sectoral distribution of new investment, (3) the degree of participation in world markets, and (4) the distribution of national income between different groups in the population and different public authorities. The scale and composition of current output are, as a rule, decided in the production units themselves, in response to the economic incentives provided by markets that are increasingly free from price control. In certain cases, however, local governments influence the decisions of the production units on the basis of noneconomic considerations.

While many of the economic functions performed by the State in Yugoslavia are also the responsibility of the State in other non-collectivist countries, there are important differences between Yugoslavia and these countries, both in the organizational structure of the economy and in the scope of state intervention. As mentioned above, all enterprises employing more than a few persons are in public ownership. More important, the operation of each enterprise in the socialized sector is largely controlled by the employees of that enterprise; and the workers are paid, not by a wage representing in some sense a market price of labor, but rather by a share in the gross profits of the enterprise after deduction of cost of materials, depreciation, and various taxes.

An important feature of the system is the high level of taxation which, when supplemented by substantial savings on the part of enterprises, provides the means to finance an exceptionally high level of investment and is largely responsible for the rapid pace of economic growth and industrialization. Since a substantial proportion of national investment is financed out of funds directly controlled by the central authorities, and since long-term lending between enterprises has not been allowed until recently, the authorities are in a position to ensure that the distribution of investment between the different branches of activity conforms fairly closely to pre-established investment plans. In addition to the savings put at the direct disposal of the central authorities, there are a variety of general and special purpose investment funds accumulated, partly out of taxation, by enterprises, public institutions, and local authorities. The use of such funds is subject to various restrictions and regulations imposed from time to time. The National Bank, which now firmly controls the banking system, has not only, as in other countries, the function of regulating the supply of short-term and medium-term credit and controlling the supply of money in the light of the general degree of demand pressure prevailing in the country, but also the function of recording the transactions of enterprises and institutions and controlling the fulfillment of legal obligations. 1

The Individual Enterprise in Yugoslavia

Private enterprises in Yugoslavia are confined by law to small-scale production and trade (employing no more than five people, plus the owner’s family) and to farms not normally exceeding ten hectares in size. Socialized enterprises and institutions account for much the greater part of the employment and output in the country outside agriculture and handicrafts, where private enterprise still predominates.

The individual enterprise in the socialized sector enjoys a relatively high degree of freedom from state control. Within a framework of laws and general regulations, its management is legally in the hands of its own workers, whose incomes are dependent on its profitability.

New enterprises may, in principle, be established by public authorities, associations, enterprises, or individuals; but since the founder of an enterprise has to guarantee any loans raised to finance the initial capital stock, while having no right, as founder, to control or draw income from the new enterprise, it is not surprising that in practice most enterprises are set up by public authorities, particularly the Communes.

Once an enterprise is established and its working force recruited, it is put under the control of a Workers Council representing all its workers. An Executive Board (elected by the Council) and a Director, the legal representative of the enterprise (appointed by agreement between the Workers Council and the Commune), are responsible for the implementation of the Council’s decisions and for day-to-day management.

The enterprise is then free to determine the composition of its output, its methods of production, and the scale of its output and employment, but it is not always free from a measure of influence over its decisions exerted by the Commune. It may purchase its materials freely, except that many materials are still subject to import restrictions. It may sell its products at the best prices it can obtain, save for certain commodities which are subject to price ceilings or other more flexible controls over prices, and a few on which there are export controls. It may borrow from banks and investment funds and may hold money on deposit with banks; but, until recently, borrowing from or lending to other enterprises was not permitted, with the important exception of short-term trade credit. In 1961, however, certain basic regulations were introduced to permit and facilitate lending between enterprises.

The enterprise in the socialized sector has to hand over a considerable portion of its income to the public authorities, and its disposal of what remains is, in part, determined by legal regulations. Regulation and taxation, however, are so applied as to retain, as far as possible, a pecuniary incentive to efficient operation.

The receipts of the enterprise, after payment of working costs, excluding wages but including interest on loans and credits, are subject to compulsory deductions for (1) depreciation of fixed assets, (2) a tax known as “interest” on fixed and working capital owned by the enterprise, (3) miscellaneous taxes and membership fees, and (4) turnover taxes. What is left of the receipts of the enterprise after these deductions is known as its income and is subject to a profits tax, or “contribution,” as it is called. Until recently, the rate at which this tax was levied was higher, the higher the net income of the enterprise relative to a hypothetical wage and salary bill, calculated on the basis of minimum wage rates. This progressive tax was considered to give enterprises too little incentive to increase productivity; and in the 1961 tax reform (see p. 213, below), it was replaced by a flat rate tax, amounting in most industries to 15 per cent. However, some progressivity—though less than that prevailing formerly—has been retained for the time being through the imposition of the temporary excess profits tax referred to below.

The net income of the enterprise, after payment of the above “contribution,” is allocated between (1) personal incomes of the workers and (2) the business funds of the enterprise, to be used, for the most part, in the financing of new investment. When making this allocation, the enterprise has to observe certain rules: (a) the payment of minimum wages takes priority over other expenditures; (b) a reserve fund has to be established by the enterprise and a contribution has to be made to the reserve fund established by the Commune, to guarantee to workers of the enterprise and of the Commune, respectively, the payment of minimum wages; and (c) out of any increases in income, not more should, in theory at least, be assigned to increased personal incomes than may be held to arise from increased productivity or business efficiency.

The amounts allocated to the personal incomes of workers and to the business funds of the enterprise are subject to further taxation: of the amount allocated to wages, the enterprise has to pay 15 per cent to the communal budgets and 24 per cent to the Social Insurance Fund; of the amount added to the business funds of the enterprise, it has to contribute 20 per cent to the communal investment funds and 4 per cent to the communal housing fund. Moreover, if, during any year, an enterprise realizes enough income to allocate to its own funds, after payment of taxes and wages, an amount representing more than 6 per cent of its assets, it is considered as having made an excess profit, and 25 per cent of the excess has to be paid to the federal budget.

Each of the capital funds of the enterprise—the depreciation fund, the reserve fund, and the investment fund—is kept in a special bank account, subject to its own special set of regulations and separate from the ordinary giro account or working balance of the enterprise.

In general, enterprises in the socialized sector are very heavily taxed. If the present tax system had been in operation in 1959, 28 per cent of the net value added of enterprises would have been allotted to take-home pay, 20 per cent to personal income taxes and social insurance, 41 per cent to business taxes and other compulsory payments to government budgets and social funds, and 11 per cent to funds owned by the enterprise. The amount thus distributed is arrived at after allocation, to the depreciation fund, of 11 per cent of gross value added.

Despite the weight of taxation, the combined effect of the various regulations governing the distribution of the income of socialized enterprises is such that enterprises retain a real incentive to increase productivity and to economize in the use of materials.

Yugoslav firms are enrolled in compulsory associations or Chambers, which foster research and higher productivity, and generally serve as an intermediary between the enterprise and the State. Though generally lacking in mandatory powers, they sometimes organize agreements fixing maximum buying prices for raw materials. Enterprises are also allowed to form business associations with power to make contracts and to organize joint production, marketing and purchasing, etc. There are certain safeguards, whose efficiency is difficult to gauge, against combination in restraint of trade.

The socialized enterprise can expand its capital stock by investment out of its own resources or by borrowing from one or another of the social (public) investment funds. In the latter event, it usually has to put up part of the money from its own funds and often has to obtain a guarantee from the Commune. It pays a somewhat higher rate of interest on such loans than the capital tax payable on that part of the capital against which no loan is outstanding.

Finally, the socialized enterprise may be wound up by the local authority if it fails to meet its financial obligations, including taxes and wages on the minimum scale prescribed by law.

Agriculture and handicrafts are carried on for the most part by enterprises in which the means of production are privately owned. In agriculture, some 90 per cent of the land under systematic cultivation is owned by independent peasant proprietors, who number over 2.6 million. The remaining 10 per cent of the land is under public owner-ship. Half of it is cultivated by about 560 economic organizations operating, as in other branches of the economy, under workers’ management. The other half is cultivated partly by collective farms of the general Eastern European type (Peasant Workers’ Cooperatives) which, until 1953—before provision was made for every peasant to leave the cooperatives—played an important part in Yugoslav agriculture; and partly by cooperatives of a looser type which are designed to play an increasingly important role vis-a-vis the independent peasant farmers. The latter type of cooperative provides productivity-enhancing services for the private farmers with a view to gaining their confidence and their voluntary cooperation in expanding the socialist system of production in agriculture.

Private ownership of agricultural land in Yugoslavia is practically confined to those who cultivate it, and even cultivators are not allowed to own or rent more than 10 hectares (i.e., some 25 acres) or, in some exceptional cases, 15 hectares. Subject to these limitations (which do not apply to socialized and collective farms), land can be bought and sold, bequeathed and rented. Peasant proprietors may acquire other means of production freely, but lack of resources and exclusion from the price subsidies granted to socialized farms and cooperatives practically preclude them from acquiring any heavy or modern farm equipment. Private peasants run their farms as they wish, buy materials, and sell their products freely. They can borrow from the cooperative savings banks organized under the Agricultural Bank; but for long-term capital expansion they are dependent on their own savings, since practically all the money invested in agriculture by the social investment funds goes to socialized farms and to agricultural cooperatives.

The economic role of the private farms is considerably less important, relative to that of the socialized and collective farms, than their respective acreages would suggest. They are small and ill equipped. While the socialized and collective farms and cooperative societies are well provided with tractors and other farm machinery, less than half the private holdings possess a plough, and less than 40 per cent a horse or other draft animal. The socialized and collective farms, under the guidance of agricultural experts, also apply more modern methods than do the private farms. Moreover, private farms are small—averaging, as they do, only some 4.6 hectares, against 670 hectares for the average socialized farm and 350 hectares for the average collective farm. As a result, crop yields per acre are about twice as high on socialized and collective farms as on private farms. Moreover, private farms, with low per capita productivity, produce mainly for home consumption, while the socialized and collective farms produce almost entirely for the market.

The role of the agricultural cooperatives is interesting and important. Membership is voluntary. Their financial resources are provided partly by the members and partly by the State. They provide many services, for payment, to both members and nonmembers. Thus, they purchase and market farm products; they sort and process such products; they procure and sell producer and consumer goods to farmers; they manufacture building materials, furniture, footwear, etc., for the village population; they accept savings deposits and provide short-term and long-term credit; they hire out tractors and farm machinery; and, recently, they have taken to organizing farm production on modern lines for peasant farmers on a profit-sharing basis. Some of the profits earned by such cooperatives are distributed to members, but most of them are retained to expand the resources of the cooperatives.

The Yugoslav authorities appear to be pinning their hopes for an improvement in the efficiency of Yugoslav agriculture partly on a growth of the socialized sector and partly on the work of these cooperatives with the independent peasants. It seems, however, that the voluntary cooperation of peasant farmers with the agricultural cooperatives has recently experienced some setbacks. A number of cooperatives, encouraged by the authorities to take up loans for the purchase of additional agricultural machinery, may have incurred excessive credit obligations and are not now in a position fully to service their loans. For the time being, these financial difficulties create a climate between independent peasant farmers and cooperatives that is not conducive to closer cooperation. Thus, in their effort to increase productivity in agriculture, the authorities, at present, emphasize the expansion of the socialized sector in agriculture.

Wage and Price Formation

In the enterprises of the socialized sector—as distinct from public institutions, such as hospitals, banks, etc.—workers are paid essentially by a share in the profits, and the wage has largely lost its function as a price of labor. This statement calls for certain qualifications, however. In the first place, there are minimum wages, set by the State. These are uniform throughout the country, but differentiated according to numerous groups of enterprises and categories of workers. An enterprise may not pay less than the minimum wage, and some—a few—unprofitable enterprises cannot afford to pay more. In most instances, however, minimum wages are far below the incomes actually received by workers.

The enterprise establishes its own scale of wages based on the prospective profits of the enterprise and on the desired allocation of these profits between personal incomes and the funds of the enterprise. These wages are influenced, however, though to a diminishing extent, by the trade unions and by the Producers Council of the local Commune. The trade unions, having no need to bargain for higher wages—since the enterprise itself is managed by its workers—try to minimize discrepancies in wage scales where these are not justified by differences in productive efficiency. Over and above the regular wage scales, quarterly or annual bonuses may be given in order to raise the total personal incomes of the workers to the desired proportion of gross profits. Attempts are made by the Communes to ensure that any abnormally high profits attributable to factors other than high personal efficiency are ploughed back into the enterprise rather than distributed as current earnings. If profits prove not to be high enough to cover the wages already paid, the deficit will be met either out of the reserves or other available resources of the enterprise or by short-term financing from the communal reserve fund.

While for the workers of the enterprise as a group the level of wages is largely governed by the level of profits, wage scales retain considerable importance in determining the relative wages of different types of workers and, through piece-rate systems, in providing the workers individually with an incentive to produce. To an increasing extent, however, the attempt is being made to provide this incentive by paying workers in particular units of the enterprise on the basis of the profits accountable to these units.2

Prices in Yugoslavia, for the most part, are freely determined by demand and supply on the domestic market, but the supplies and prices are very much influenced not only by domestic turnover and sales taxes but also by instruments of foreign trade policy, such as custom duties, export subsidies, and export restrictions.

Foreign trade (the average of imports and exports) is equivalent to some 18 per cent of Yugoslavia’s social product, and the freedom with which, and terms on which, goods can be exported and imported have a great influence on the structure of relative prices on the domestic market. As a result of measures taken late in 1961 and early in 1962, the multiple exchange rate system with its so-called settlement rate (Din 632 per U.S. dollar) and its numerous “coefficients”—which had resulted in effective exchange rates running from 80 per cent to 250 per cent of the settlement rate—has been replaced by a system with a uniform exchange rate (Din 750 per U.S. dollar), supplemented, however, by subsidies amounting to 10 per cent, 22 per cent, and 32 per cent on various types of exports, and by substantial customs duties on manufactured imports. Moreover, despite a liberalization of imports in 1961, more than 70 per cent of imports are still subject to some form of quantitative restriction. The discrepancy between the prices of various foreign trade goods on the world market and their prices on Yugoslavia’s domestic market has been considerably lessened by the shift from multiple exchange rates to import duties cum export subsidies and by the relaxation of import restrictions. Nevertheless, domestic prices of agricultural products (especially essential foods), fuel and raw materials, and, to a lesser extent, semifinished products are still relatively low, while those of manufactured consumer goods, exportable capital goods, and luxury foodstuffs are still relatively high, compared with those prevailing in most western industrial countries. As a result, the production of industrial goods is still favored over that of agricultural and forestry products. The consequential diversion of income from agriculture, which is lightly taxed, to industry and trade, which is heavily taxed, has in the past made it easier to skim off a high proportion of national income in taxation and hence to attain that high level of public saving and investment which is largely responsible for the pace of industrialization. The same factors, however, bear some responsibility for the relatively lagging development of agriculture. The price distortions involved have also had a bad effect, misdirecting not only current production but also new investment, whether financed by enterprises or by social funds.

In their efforts progressively to remove these distortions in the price structure, the Yugoslav authorities have adopted the price pattern prevailing in the economies of Yugoslavia’s convertible currency trading partners as the main standard by which to guide their price policies. In the course of the coming years, most prices on the domestic market are to be brought gradually into alignment with this price pattern, by means of appropriate investment and import policies, and above all by the planned gradual elimination of export subsidies and import restrictions. In this way, the authorities will attempt to correct the misleading price incentives to consumption, production, and investment, still embedded in the foreign exchange system.

Though prices, in general, are formed rather freely on the domestic markets, those of some goods and services are subject to varying degrees of regulation. Thus, the prices of a few goods and services (sugar, tobacco manufactures, and electric current) are fixed by the federal authorities. Federal price ceilings are still applied to materials in short supply, mainly domestically produced: crude oil and its derivatives, coke, steel products, copper, lead, zinc, aluminum, cement, some basic chemical raw materials, pulp, cellulose, kraft paper and bags, newsprint, artificial fibers, raw hides, wool, fodder of industrial origin, and pharmaceuticals. Altogether, goods still subject to ceilings comprise about 25 per cent of total domestic output of raw materials and semimanufactures. Price ceilings are also set locally for house rents and for utilities, such as public transport. Attempts, not always completely successful, are made to adjust ceiling prices to changes in production costs and in world market prices.

In addition to these definite measures of price fixing and price limitation, a looser system of advance notice and control of price changes is applied to important sectors of the consumer goods trades, comprising less than half of total consumption. This control is exercised at the retail level by the Communes, at the wholesale level by the Republics, and at the production level by the federal authorities. Enterprises are required to give the authorities one month’s notice of intended increases in prices, together with a justification in terms of production costs, i.e., costs of materials, amortization at prescribed rates, labor costs, and “normal” income over and above labor costs— all these being calculated on the basis of the utilization of the plant to full capacity. Only a very small proportion of requests for price increases have been questioned by the federal authorities, and such questioning has often been accompanied by other governmental intervention, designed to reduce production costs. However, the facts that justification is required for price increases, and that permission can in the last resort be refused, must exercise a stabilizing influence on prices. The range of goods subject to advance notice and control of price changes is being steadily reduced.

The general effect of these measures of price control is to keep house rents and the prices of public utility services, essential consumer goods, and raw materials lower than would otherwise result from the structure of production and consumption and the present foreign exchange and foreign trade system. Except as applied to monopolies and public utilities, price control is not regarded as a permanent feature of the Yugoslav economy, but rather as a temporary expedient to deal with the maladjustments and inflationary tendencies associated with the change-over to a more decontrolled type of economy. Not only has the range of goods covered by the various types of controls been gradually reduced, but scarcities have been relieved by raising certain controlled prices, for instance, house rents and tariffs on electricity.

In Yugoslavia, as in many other countries, the authorities guarantee minimum support prices on certain farm products, to be implemented, if necessary, by government purchase. Support prices are set for cereals, wine, beans, and quality livestock. The purpose of the support guarantees is to give the farmer a sense of security. In practice, market prices have always been above support levels, and since the 1961 foreign exchange reform they have shown a further substantial rise.

The absence of rigid wage costs inherent in the profit-sharing system of Yugoslavia, together with a spirit of competitiveness between the different enterprises, should make product prices more flexible than in other countries. If this were so it would be possible, by controlling the supply of money and the level of investment, to maintain the stability of the general price level, and also to bring about changes in relative prices—e.g., the changes in the relative prices of agricultural and industrial goods implicit in the recent trade and exchange reform— without detriment to the growth of output. It does not seem, however, that this potentiality has yet been fully realized. The workers expect to see their real wages grow pari passu with increases in productivity, or in relation to those of other workers, even when—owing, e.g., to bad harvests or to changes in relative prices of the type mentioned above—these aims may not be compatible with full employment. To achieve these aims, the enterprises may keep industrial prices from falling, or even raise them when the market situation does not warrant it. There will then be strong pressure on the banking system to expand credit so as to maintain production near to capacity. Unless this pressure is resisted, a sort of cost-induced inflationary pressure may develop; if it is resisted, those responsible for pricing in enterprises will probably come to realize the need for flexibility in the face of market situations.

Fiscal System

The fiscal system in Yugoslavia exercises an important influence on the rate of saving, on the distribution of income, and on the incentives to invest in different branches of production.

The total amount of taxes, including those accruing to the social investment loan funds and other social funds (but excluding social security contributions, loan interest, and compulsory depreciation allowances), may be estimated at about one third of social product as calculated in Yugoslavia, and about the same proportion of national income as calculated according to western definitions.3 An important tax reform was introduced early in 1961 which, though designed to leave the over-all tax yield unchanged, had a marked effect on the structure of the fiscal revenue. The structure of taxation before and after the reform was as follows:4

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Tax rates differentiate considerably between industries and between the socialized and the private sectors of the economy. The capital tax (“interest”), which is confined to the socialized sector, is nominally 6 per cent of the capital of the enterprise; but since lower rates are allowed to industries where profits are low and to those which it is desired to encourage, the average rate is only 4 per cent. Agriculture, both private and socialized, pays no capital tax. Turnover and sales taxes are applied partly for the purpose of absorbing profits considered to be abnormal, and they vary widely between industries. All essential foodstuffs (except salt and sugar), electric power, fuel, steel, and rolling stock are exempt from these taxes. A federal turnover tax, applied to more than 50 per cent of the goods produced, averages between 10 and 15 per cent, but the rate is generally higher for rubber manufactures, paper, and chemicals; for some consumer goods (large automobiles), it is as high as 65 per cent. Though an attempt is made to confine this tax to a single stage of production, there are cases—in textiles and metals—where it is levied at several stages. In addition, a federal turnover tax of ½ per cent was introduced in 1961 on all sales by economic enterprises.5 The tendency over recent years has been for turnover taxes on raw materials and semifinished goods to decline, and for those on finished goods to increase. Communal taxes on retail sales average between 3 and 5 per cent.

Profits and wage taxes also differentiate between sectors and between industries, though less so than in former years. Thus, the profits tax is confined to enterprises in the socialized sector; and even within that sector, it applies less severely to certain industries, and not at all to agriculture. Mining enterprises pay a special tax, which was introduced in 1961. This, however, does not represent a discrimination against mining as such, but is an attempt to tax away the greater part (80 per cent) of the rent element in the income of individual mining enterprises. The excess profits tax, by its very nature, bears more heavily on some industries than on others, and, like turnover taxes, is partly intended to reduce differences in the rate of profits earned in different economic branches. The tax on wages is uniform, at 15 per cent, throughout most socialized enterprises, but is less both for socialized agriculture and for private enterprise. There is also a surtax on personal incomes, which does not apply to agricultural producers.

Private farmers are taxed relatively lightly. While about one half of the gross income of socialized enterprises goes to pay taxes other than social insurance, the farmer pays a tax averaging 16 to 17 per cent of the cadastral (conventionally computed) income, which is currently somewhat below the actual income of his farm.

It will be seen that these tax differentiations tend to offset in part the effects of the price policies, discussed in the previous section, on the incomes of different economic branches. Alternatively, it may be said that these price policies divert income into those sectors and industries where high differential rates of tax can be applied. The latter aspect is the more important where the price spread between industry and agriculture is concerned, but the former is the more important for the price spread between industries producing more essential, as against those producing less essential, goods.

The revenues from taxation are distributed among the budgets of the Federation, Republics, Districts, and Communes, the social investment loan funds, and special social funds. Roughly 60 per cent of the revenues accrue to the budgets and 40 per cent to the various social funds; of the latter, the social investment loan funds, which finance general economic investment, receive by far the biggest share. The special social funds are set aside for projects of a specifically “social” character, such as housing, the promotion of agriculture and forestry, water supply, roads, the training of personnel, etc. There is also a social security fund supported by social insurance contributions.

The federal budget receives the lion’s share (60 per cent) of total budgetary receipts, including the receipts of government agencies, establishments, and firms, as well as tax revenues. The Communes receive close to 20 per cent, and the remainder is fairly equally divided between Republics and Districts.

The expenditure side of Yugoslav budgets calls for no great comment, except to say that, over the last three years, about half of the federal budget was spent on defense, about 5 per cent on subsidizing the budgets of the Republics (which in turn pass on part of what they receive to Districts and Communes), and some 15 per cent on subsidizing the economy, especially agriculture, in various ways. Expenditure on export assistance, which in 1961 constituted almost 10 per cent of budgetary expenditure, should gradually disappear.

In general, the principle of budget balance is maintained. Under regulations introduced in 1961, banks are forbidden to extend credit to governments of Republics, Districts, and Communes. In an emergency, these governments may draw on reserve funds accumulated for this purpose. The Federation also plans to spend less than it receives, and though in the course of the year the Federal Government may borrow up to a certain amount, which has to be repaid before the end of the same year, its accounts on a cash basis have recently been in balance or surplus.

Financing of Investment

The level of saving and investment in Yugoslavia is extremely high. Net investment in 1961 amounted to some 35 per cent of the social product; close to 6 per cent was financed from abroad, leaving some 29 per cent to be covered by domestic saving. If investment and saving were expressed in proportion to net national income on western definitions, the percentages would be rather similar. Social welfare investment, private construction, and administrative investment amount to some 9 per cent of the social product, leaving some 26 per cent for directly productive investment. Of this, on average, 90 per cent may represent investment in the socialized sector.

The share of private investment in directly productive investment depends largely on the year’s agricultural output. Given their rather stable level of consumption requirements, private peasant farmers allocate to investment much of the additional income accruing to them in good years, thus raising their share in total investment. Even in agriculture’s record year 1959, however, the share of private investment did not exceed 14 per cent.

The very high rate of saving is achieved partly through collective saving out of taxation and partly through saving of a more voluntary character by socialized enterprises and private farmers. Most investment finance is provided in the form of loans, but the need to repay the loans over a rather short period is a factor tending to augment the amounts saved by enterprises and local authorities.

In earlier postwar years, practically all investment was financed from taxation, and investible funds were provided directly by the authorities, largely in grants. By now, a considerable degree of decentralization has taken place. Nevertheless, investment policy remains the principal instrument of central planning in Yugoslavia.

The use of budgetary allocations is confined to the financing of investment in the fields of health, education, welfare, etc.—about 3 per cent of total investment. Much the greater part of the public financing of investment is done through social investment funds, at the levels of Federation, Republics, Districts, and Communes, by the investment funds of state institutions, and by a variety of specialized local funds, notably the housing funds. The investment funds of public institutions finance their own investment needs. The other funds, however, lend money for investment by enterprises and cooperatives. Only exceptionally do the social investment funds now provide money to investors on a grant basis—mainly for railways, roads, ports, and airports. The general investment fund subsidizes, to a certain extent, the investment funds of particularly underdeveloped Republics and regions, but the latter funds are used to make loans, rather than grants, to the ultimate investors. The social investment funds are administered by banks: the funds of the Federation and Republics, by the Investment and Agricultural Banks; and those of Districts and Communes by the Communal and Agricultural Banks. This mode of administration has the advantage, compared with budgetary allocations, of maintaining greater continuity of operation and of facilitating closer financial scrutiny of projects.

Another factor making for decentralization is the increasing importance of self-financing by enterprises through compulsory amortization funds and voluntary investment funds. These now account for some 30 per cent of gross investment financed by the social sector.

Despite these developments, the central authorities retain a considerable control over the pattern of investment. The general (i.e., federal) investment fund and the Republics’ investment loan funds, all of which are managed by the Investment Bank (and to a lesser extent by the Agricultural Bank), provide, in combination, about 70 per cent of the resources used for investment lending; over 60 per cent is financed by the general investment fund alone, from resources that are derived from the proceeds of the capital tax, from a share in the profits tax, and from borrowing abroad, etc., as well as from repayment on earlier loans. Through the policy of requiring that the borrowing enterprises or local authorities put up a share of the finance for any investment project, the Investment Bank can control a very large part of the investments in the country. An additional instrument in the hands of the Investment Bank is its almost exclusive right to authorize the allocation of foreign exchange for imports of capital goods.

The usual technique for distributing investment funds is for the Investment Bank to publish statements at intervals regarding the purposes for which loans will be available, and to invite bids from investors, i.e., from local authorities so far as the setting up of new enterprises is concerned. Bids are then scrutinized, and an allocation of funds is made. All aspects of the operation receive the fullest publicity.

In inviting bids and in deciding how much is to be allocated to different branches of the economy, the Investment Bank is guided by the central investment program outlined in the Social Plan. Here a variety of criteria seem to be applied. Some account is taken of profitability, but this is a rather vague concept under Yugoslav conditions and considerable use is made of an alternative market criterion—the ratio of the value of additional output to that of the new investment. However, the existence of price distortions in the economy, and the fact that much investment is productive only indirectly, make it impossible to rely entirely on market criteria in the planning of investment. Sometimes the need for additional capacity (i.e., for generating electric power) is calculated directly in physical terms. A preference is given to activities likely to improve the balance of payments. A general influence encouraging investment in certain branches of activity in preference to others is provided by the regulations prescribing the minimum extent to which investors are required to participate in the financing of projects assisted by the general investment fund. The minimum participation is negligible in the field of power and fuel; in building it varies between 10 per cent and 30 per cent, in agriculture between 10 per cent and 40 per cent, in transport between 20 per cent and 50 per cent, and in industry between 20 per cent and 80 per cent.

Before providing investment finance for any individual project, the Investment Bank has to ensure that the income arising from the project will be sufficient to cover the interest charge on the loan, the cost of repaying the loan over a certain maximum period, and the capital tax on that part of the additional capital against which no loan is outstanding. Interest rates run mostly from 2 to 6 per cent; and though they vary somewhat according to the economic activity in question, they are so low in relation to the potential profitability of capital in Yugoslavia that they have little or no effect on the distribution of investment. More important are the federal regulations regarding the maximum periods within which investment loans have to be repaid. These naturally vary widely according to the nature of the investment (e.g., 30 years in the steel industry, 20 years in shipbuilding), but the average repayment period in industry is about 8 years.

As a rule, however, there are more projects that can meet these tests than can be financed by the available resources, and the Bank has to scrutinize projects. In doing so, it applies criteria similar to those previously discussed, but with more emphasis on financial criteria. The borrowing enterprise has to provide detailed information about the cost, construction period, and probable yield of the investment, the balance of payments effects, etc., as well as information about its own solvency. Sometimes a loan is forthcoming only if the local authority is prepared to provide a guarantee. Ability on the part of the investor to repay the loan within less than the maximum period, or to participate with its own funds to more than the minimum extent required, are favorable factors.

Local investment funds have more liberty than the general investment fund in respect of interest rates and terms of lending. In 1961, however, these local funds were subjected to a federal tax of 6 per cent on the outstanding amount of loans granted by them, and they must therefore charge relatively high interest rates to their borrowers. In part, the local investment funds cover the investment needs of smaller enterprises, and in part they help the larger enterprises to obtain loans from the general investment fund by providing part of the investor’s share in the total cost of the investment.

Any miscalculation regarding the cost or construction period of the investment is at the expense of the investing firm or authority, which is obliged in this connection to make a guarantee deposit with the Investment Bank.

Of all social investment funds and other special funds, only the general investment fund is allowed to borrow from the banking system, and this only for the purpose of meeting seasonal deficits.

A variety of regulations exists regarding the extent to which investment funds of enterprises and local authorities can be spent within a given period, and regarding the extent to which they must be spent on working capital. Since the main importance of these regulations lies in their impact on the monetary situation, they are considered in the following section.

Monetary System

The banking system in Yugoslavia—from which may be excluded the activities of certain banks as administrators of the social investment funds—consists of the National Bank, a few specialized banks, the banks of the Republics, and a large number of communal banks and savings banks. It is dominated by the National Bank, which accounts for about 20 per cent of the assets and over 60 per cent of the liabilities of the system. Before April 1961, when the National Bank transferred all outstanding credit to enterprises to the communal banks, the National Bank’s share in the assets of the system was more than twice as large as it is now. The National Bank now grants credit, as a rule, only to the Federal Government, to the general investment fund, to the specialized banks, and to the Republics’ banks. In addition the National Bank, through its many offices, handles the bank accounts of all enterprises as an agent for the communal banks and in this way keeps a check on all transactions between enterprises.

The specialized banks—the Foreign Trade Bank, the Agricultural Bank, and the Investment Bank—derive most of their resources from the National Bank and extend credits to their respective sectors. In exceptional cases, these credits are granted directly to enterprises but, as a rule, they are channeled through the banks of the Republics and the communal banks. The banks of the Republics serve as intermediaries between the National Bank and specialized banks, on the one hand, and the communal banks, on the other, and coordinate the credit operations of the latter in their respective territories.

Each of the (about 840) Communes is entitled to establish its own communal bank, which may accept deposits from, or extend credits to, all enterprises and institutions in its territory. All enterprises and institutions in the Commune stand as guarantors for the communal bank and are represented on its board. Where the resources of individual Communes are too limited to enable separate banks to operate on a sound basis, a number of them may combine to support a single bank. There are also cooperative savings banks, which provide credit and banking services for agricultural cooperatives and the larger farms.

All these banks, except the specialized banks and those of the Republics, are obliged to keep with the National Bank reserve deposits, the amount of which depends on the nature of the liability; these reserve requirements can be altered within limits at the discretion of the National Bank. At least equally important, however, for the control of the central bank over the rest of the system, is the fact that the National Bank is in a strong creditor position vis-à-vis most of the other banks.

The banking system has three main functions: (1) to maintain internal financial stability; (2) to provide the economy with an adequate, and appropriately distributed, supply of working capital; and (3) to watch over the transactions of autonomous enterprises and local authorities, to ensure that they observe all legal regulations.

The last-mentioned function, one commonly performed by banks in strictly planned economies, requires the canalization through the banking system, under the close supervision of the National Bank, of all business and governmental payments, other than those to and from consumers, farmers, and craftsmen. The system of financial control also finds expression in the creation of a multiplicity of special purpose bank accounts, the credits and debits to which are subject to regulations that alter quite substantially from time to time. The existence of so many different kinds of accounts makes it difficult either to measure the supply of money or liquidity, or to estimate the degree of credit expansion or contraction that may be required to produce a desired effect on the degree of demand pressure in the economy.

The principal forms of money and near-money are as follows: (1) currency, which serves as the means of payment for the population and the nonsocialized sector of the economy; (2) savings accounts of the population, which can be cashed on demand; (3) sight deposits of enterprises, governments, government agencies, social insurance institutions, and other public institutions, which can be used only for current transactions; (4) sight deposits of social investment funds, which can be used for investment lending but to a certain extent only for specific types of investment; (5) sight deposits of enterprises, which they can use to pay for investments in connection with their own operations;6 (6) reserve funds of banks, enterprises, and governments; (7) temporarily blocked deposits of amortization funds and investment funds of enterprises; and (8) temporarily blocked deposits of social investment funds.

The second objective of the banking system, that of financing working capital investment, if interpreted in the sense that the banks are solely responsible for satisfying all demands for working capital funds, is, strictly speaking, inconsistent with the first objective of preserving internal financial stability. This was found to be the case in practice in the earlier postwar years, when Yugoslavia experienced a good deal of inflationary pressure as a result of the widespread conviction that the provision of working capital was a job for the banks alone.

This conflict of purpose has not yet been completely resolved, but its resolution has been sought along two main lines: (1) by so restricting the use of various types of bank balances as to promote an accumulation of inactive balances to offset part of the expansion of bank credit; and (2) by diverting an increasing proportion of the investment resources of enterprises and social funds to the financing of working capital.

The former approach was the first to be tried. It is now being gradually abandoned in favor of the second. There remain, however, the following restrictions: (1) social investment funds other than the general investment fund may spend during the current year only money that has been acquired in respect of previous years, while current receipts including repayments of former loans may be used only to finance working capital; (2) similarly, enterprises’ expenditures on fixed capital out of their own freely disposable investment funds can be made only from income earned in previous years;7 (3) depreciation funds of enterprises accumulate in blocked accounts for three months before being released;8 (4) enterprises, institutions, and governments at all levels have reserve funds from which expenditures can be made only in certain emergencies, e.g., in the event of business losses, to permit the payment of minimum wages.

In order to increase the share of working capital investment provided by enterprises and investment funds (the second approach, stated above, toward resolving the conflict of purpose), local investment funds are obliged to devote 35 per cent of their expenditures to financing the working capital of enterprises, and enterprises themselves can obtain access to new bank credits only if they are prepared to finance a substantial portion of the total sum required out of their own resources. The general investment fund also uses part of its resources to finance working capital investment. When new enterprises are set up, or the capacity of existing enterprises is increased, the total capital provided, whether by the social investment funds or by enterprises out of their own resources, must be sufficient to finance not only the fixed capital but also the initial working capital or its permanent addition. The banks cannot be called upon to provide this sort of credit.

The above-mentioned regulations and policies may be regarded as methods of limiting and controlling the demand for bank credit for working capital purposes. Increasing reliance, however, is now placed on the credit policy of the banks themselves—a more flexible instrument than any general obligations imposed on enterprises. As already mentioned, by making an appropriate degree of self-financing a condition of bank assistance, pressure is exercised on enterprises as well as on other borrowers (such as local governments and individual farmers) to reduce their demand for bank credit. As a result of the banking reform of 1961, the interest rates charged by banks for loans to enterprises have been increased and now run upward of 8 per cent. However, this probably still leaves the banks under the necessity of exercising considerable selectivity in dealing with credit applications.

Though laws enacted in 1961 envisage the use of commercial bills and Treasury bills, there is as yet no operative money market in Yugoslavia, and the amount of credit extended between firms, other than the supplier’s credit, is rather limited. Therefore, the banks play a particularly important role in the distribution of working capital between enterprises and branches of economic activity, though they are beginning to share their responsibility in this respect with the local investment funds. In performing this function, the banks test individual credit applications by some of the same criteria as are employed by the Investment Bank for investment loan applications. Thus, they scrutinize the feasibility and marketability of the expansion of output for which the additional working capital is required, the solvency of the borrower, and his willingness to meet an appropriate share of the cost of the additional output out of his own funds. As with investment loans, the local authority may be required to guarantee the solvency of the borrower.

The recent devolution of the commercial banking function from the National Bank to the communal banks should greatly strengthen the hand of the former in controlling the total expansion of credit and of the money supply if only by imposing a series of buffers—the communal banks, the banks of the Republics, and the specialized banks— between the National Bank and the insistence of the ultimate demanders of credit. As we have seen, the existence of variable reserve requirements for banks, and the strong creditor position of the National Bank vis-à-vis the other banks, should make it possible effectively to control the supply of credit, though the system is still at an experimental stage. A further safeguard lies in the limitations, enacted in the annual credit plan, on the amounts of credit that can be granted by the National Bank itself to the several specialized banks and to the banks of the Republics. These credit ceilings can be altered only by legislation.

While the reduction of relative price distortions in the Yugoslav economy over the last two years has been associated with appreciable increases in the general cost of living, monetary and fiscal policy has been sufficiently firm to maintain a fair degree of internal financial stability, despite a very high rate of investment and economic growth. In this, Yugoslavia has been assisted by substantial amounts of grants and credits from abroad.


Le système économique de la Yougoslavie présente de nombreuses caractéristiques qui le différencient tant des économies collectivistes de type soviétique que des économies plus ou moins capitalistes de type occidental. Dans les premières années d’après-guerre, l’agriculture était collectivisée, et dans les autres secteurs de l’économie, la production, le commerce, les prix, et les revenus des particuliers étaient soumis à un contrôle centralisé rigoureux. Depuis 1950, une transition s’est opérée en faveur d’un type d’économie beaucoup plus libre dans lequel les activités des consommateurs, agriculteurs et entreprises socialisées sont coordonnées de façon croissante par l’intermédiaire des mécanismes du marché. Le présent article analyse le stade atteint par ce processus de décentralisation peu de temps après l’unification du taux de change et la réforme de la politique commerciale de 1961.

A l’heure actuelle, la planification de l’économie se limite surtout, comme dans les économies occidentales, au domaine fiscal et au domaine du crédit, l’ampleur et la composition de la production courante étant généralement déterminées dans les unités de production en fonction des impulsions du marché. Le contrôle des prix constitue maintenant l’exception et non la règle. Alors que toutes les entreprises qui emploient plus qu’un petit nombre de personnes sont propriété publique, le fonctionnement de chaque entreprise dans le secteur socialisé est contrôlé en grande partie par les employés, et les ouvriers ne reçoivent pas un salaire qui représente le prix de la main d’oeuvre sur le marché mais plutôt ils participent aux bénéfices de l’entreprise. La rétribution de l’ouvrier individuel est conçue de manière à encourager la productivité.

Environ la moitié de la valeur brute ajoutée par l’entreprise soci-alisée moyenne est percue par les autorités communales et fédérales sous forme d’impóts. Ce niveau élévé de l’imposition fiscale, lorsqu’il s’augmente encoré d’une épargne substantielle de la part des entre-prises, contribue au financement d’un niveau exceptionnellement élévé d’investissement et est en grande partie la cause du rythme rapide de l’expansion économique et de l’industrialisation. Comme une proportion substantielle de l’investissement national est financée au moyen de fonds directement controlés par les autorités centrales, et que les préts á long terme entre les entreprises ne sont autorisés que depuis peu, ees autorités sont en mesure de s’assurer que la répartition de l’investissement entre les divers secteurs d’activité correspond d’assez prés aux plans d’investissement pré-établis.

On pense que la séparation intervenue récemment entre les fonctions de banque céntrale et celles de banque commerciale a renforcé le controle de la banque céntrale sur le crédit. Contrairement á ce qui se fait dans les autres pays, cette derniére n’a pas seulement pour fonc-tion de réglementer l’octroi du crédit á court et á moyen terme et de contróler la circulation monétaire en fonction du degré de pression genérale exercé dans le pays par la demande, mais elle doit aussi enregistrer les transactions des entreprises et institutions et veiller á ce que les obligations juridiques soient satisfaites.


El sistema económico de Yugoslavia muestra muchas características que lo diferencian tanto de las economías colectivistas de tipo soviético, como de las economías occidentales más o menos capitalistas. En los primeros años de la postguerra, la agricultura se encontraba colectivizada y en el resto de la economía, la producción, el comercio, los precios y los ingresos personales, estaban sometidos a un control centralizado riguroso. Desde 1950 se ha estado llevando a cabo la transición hacia una economía mucho más autónoma en la que las actividades de consumidores, agricultores y empresas socializadas, se coordinan cada vez más a través del mecanismo del mercado. El presente estudio analiza la etapa alcanzada en este proceso de descentralización a poco de unificado el tipo de cambio y de efectuada la reforma de la política comercial en 1961.

Hoy día, el planeamiento económico central se limita en gran parte —como en las economías occidentales—a las esferas fiscales y de crédito y, por regla general, la escala y estructura de la producción corriente se determina en las unidades productivas mismas, de conformidad con la reacción a los incentivos que el mercado ofrece. En la actualidad el control de los precios no existe sino excepcionalmente. Aunque todas las empresas que emplean más de cierto número de personas son de propiedad pública, la explotación de toda empresa del sector socializado está en su mayor parte controlada por los empleados de la empresa y los trabajadores no reciben salarios representativos del precio de la mano de obra en el mercado, sino que más bien participan de las utilidades de la empresa. La remuneración que el trabajador individual recibe está concebida en forma tal que sirva para fomentar la productividad.

Las autoridades comunales y federales recaudan en forma de impuestos cerca de la mitad del valor bruto agregado por una empresa socializada ordinaria. Este alto nivel tributario, cuando lo complementan los ahorros considerables por parte de las empresas, contribuye al financiamiento de inversiones de un nivel excepcionalmente alto y constituye la razón principal del rápido ritmo del desarrollo económico y de la industrialización. Puesto que el financiamiento de una parte importante de las inversiones nacionales se hace con fondos que las autoridades centrales controlan directamente, y puesto que no es sino hasta hace muy poco tiempo que se ha permitido que las empresas efectúen entre sí préstamos a largo plazo, esas autoridades están en condiciones de poder asegurar que la distribución de las inversiones entre las diferentes ramas de la actividad económica concuerde más o menos estrechamente con planes de inversión predeterminados.

Se cree que la reciente separación de la banca central y la banca comercial ha colocado el crédito bajo el control más firme del banco central. Tal como sucede en otros países, el banco central tiene no solamente la facultad de regular la oferta de crédito a corto y a mediano plazo y la circulación monetaria de acuerdo con el grado de presión que prevalezca en el país sobre la demanda, sino también la de registrar las transacciones de las empresas e instituciones, y la de velar por el cumplimiento de las obligaciones legales.


Mr. Fleming, Adviser in the Department of Research and Statistics, is a graduate of Edinburgh University. He was formerly a member of the League of Nations Secretariat, Deputy-Director of the Economic Section of the U.K. Cabinet Offices, U.K. representative on the Economic and Employment Commission of the United Nations, and Visiting Professor of Economics at Columbia University. He is the author of numerous articles in economic journals.

Mr. Sertic, economist in the Central and Eastern European Division, is a graduate of the University of Vienna. He was on the staff of the Research Center for National Accounting in Vienna, worked for Creditanstalt Bankverein in Vienna, and, after the Hungarian revolution in 1956, was Projects Officer for the UN High Commissioner for Refugees.


Apart from footnotes 2 and 5, this article is based on the situation as at the end of March 1962.


In April 1962, the Federal Government issued an order setting out the principles and methods to be applied by enterprises when distributing their incomes, and also established by lot special committees for assisting and supervising workers’ councils in the distribution of enterprise incomes.


Gross national product according to western definitions may be as much as 120 per cent, and national income as much as 105 per cent, of social product according to Yugoslav definitions which, being constructed on Marxist lines, exclude many services.


These proportions are derived from a national application of the relevant tax rates to 1959 data.


In April 1962 the tax was increased from ½ per cent to 1 per cent.


In accordance with new regulations on enterprise funds, these deposits are gradually being transferred to the regular sight deposits of enterprises (item 3).


In 1961, 40 per cent of the current income of enterprises, after payment of taxes and wages, was blocked until 1962. The remaining 60 per cent of current net income had to be used by enterprises to finance working capital.


Prior to 1961, a large—though diminishing—proportion of depreciation funds were held in blocked accounts. Most of these were wiped out in 1961 in a single bookkeeping operation.