NEW SHIFTS IN ECONOMIC POLICY IN YUGOSLAVIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010055-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 55
• Publication Date: August 1, 1968
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
New Shifts in Economic Policy inYugoslavia
Confidential
ER IM 68-105
AUGUST 1968
COPY NO. 53
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WARNING
This document contains infe:rmation affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
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LXCLUDCD -IIOM AUTOMATIC
DUN N(IIIAUINO AND
D.CLAHTIrICATION
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
August 1968
INTELLIGENCE MEMORANDUM
New Shifts in Economic Policy in Yugoslavia
Summary
Yugoslavia is now shifting away from the economic
policies of 1965-67, which eased inflationary pres-
sures and led to a reduction of controls over prices
and imports. These policies also resulted in a
dramatic slowdown in economic growth and did little
to stimulate efficiency. Stagnating industrial pro-
duction and rising unemployment -- and the mounting
public criticism that has resulted -- have forced Tito
to retreat part way toward the pre-1965 policy of
rapid growth under tight controls.
Inflationary pressures and chronic balance-of-
payments problems led in 1964 to a major critique of
economic policy. The leadership concluded that rapid
growth, fueled by easy credit in a protected market,
would increasingly require government intervention to
correct maladjustments. Moreover, the continued
development of noncompetitive lines of production
would tend to make Yugoslavia increasingly dependent
on Communist countries for export markets. The policy
of forced economic growth thus would lead away from
the goals of a free domestic market and an independent
position in the world, between West and East.
A new strategy therefore was adopted in which
growth was to be subordinated to structural change
and increased reliance on market forces. In 1965-66
the government put the brakes on consumer and invest-
ment spending, revised the price structure, devalued
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research.
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the currency, and reformed the banking system, in
preparation for a major cutback in direct government
controls. In 1967, import controls were relaxed or
entirely removed for a wide range of goods, exposing
producers to increased foreign competition. During
the year, price controls on many of the goods that
Yugoslavia imports were removed.
Unfortunately, these policies did not work out
as planned. They did not accomplish nearly so much
as the government had expected in improving the output
mix or in increasing the competitiveness of Yugoslav
industrial goods in world markets. Moreover, the
little progress that was made was bought at the price
of an unforeseen collapse of growth in industrial
output. Investment fell by almost 30 percent during
1965-67 -- far more than had been expected -- with a
resulting 30-percent drop in construction and a slow-
down in the output of building materials, steel,
and machinery. The relaxation of restrictions on
imports of industrial materials, machinery, and some
consumer goods led to a substitution of foreign for
domestic products and a shift away from imports from
Communist countries to imports from Western countries.
The overall result was a sharp rise in inventories
during 1965-67 and a rapid decline of the rate of
industrial growth from 16 percent in 1964 to an actual
drop in output in 1967. Employment in industry fell by
3 percent during 1965-67. Moreover, the import liberali-
zation contributed to an unexpected worsening of the
hard currency deficit from $299 million in 1966 to $436
million in 1967.
Eventually, in late 1967, the government gave in
to demands for help from the areas and industries
most directly affected by current policies. The
leadership has re controlled many imports, has raised
tariffs in order to assure markets to depressed
industries, and has increased the volume of credits fo._
exports, investments, and consumer purchases. Re-
sults for the first six months of 1968 indicate that
the government's policies have begun to take effect.
Industrial production is up 4 percent over the first
half of 1967, investment in money terms is up 16 per-
cent, and the rise in inventories has begun to
slacken. Import controls have held the hard currency
deficit below last year's level for the same period,
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even though agricultural exports have dropped. The
regime now expects a revival of the rate of growth
of industrial output to 5 or 6 percent this year and
hopes that this can be accomplished without a further
retreat from the price and import liberalization
carried out in 1967.
The Yugoslavs probably will not be able to reducE!
further the need for government intervention in the
economy. As in other developing countries, the
commitment to rapid growth will produce strong infla-
tionary pressures. The need for imports to support
growth will often outrun the ability to export,
causing periodic balance-of-payments difficulties.
Because entrepreneurial skills and incentives are
lacking, it will be largely up to the government to
push investment into profitable channels and to
stimulate innovation. The present leadership will
continue trying to reconcile economic growth with
increased reliance on market forces. It will go on
using ad hoc indirect controls to deal with pressing
economic problems rather than revert to systematic
direct controls. Tito's successors, however, lacking
his personal prestige and needing to establish a
national power base, will find it mach harder to
resist demands for growth at any price and may well
abandon the hope of achieving "market socialism."
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The Nature of the Economy
1. The Yugoslav economy is semideveloped, with
levels of productivity and per capita income that
are among the lowest. in Europe. There are striking
differences in economic development among regions;
the per capita gross national product of Slovenia,
the richest area, is five times that of Kosovo i
Metohija, the most backward. Past rates of growth
in industry have been among the highest in the world,
but rapid growth usually has been accompanied by
inflationary pressures and balance-of-payments diffi-
culties. Agriculture, which employs about half of
the working population, has had an erratic growth
pattern, largely because of varying weather conditions.
2. Yugoslavia's economic system is intended to
combine state ownership of the means of production,
workers' management of enterprises, and relatively
free operation of market forces with a minimum of
direct government interference. The leadership laid
the basis for such a system during 1950-55. The
government stopped imposing obligatory production
goals, abolished the economic ministries, gave up the
state monopoly of foreign trade, discontinued the
compulsory collectivization of agriculture, and in-
troduced workers' management councils in enterprises.
In practice, however, the government continued to
manipulate economic activity by directly regulating
prices, incomes, and imports, as well as by indirect
credit controls.
3. Subject to these regulations, the workers'
councils have gradually acquired influence in enter-
arise management and the economy has taken on some
of the characteristics of a market economy. Enter-
prises can decide what and how much to produce.
Subject to tax and minimum wage legislation, they
can decide how to distribute enterprise income. The
economy, however, still has only a rudimentary capi-
tal market, and direct government control over
prices and imports frequently has interfered with
the operation of market forces.
Growth vs. Efficiency
4. The basic Yugoslav economic goal has long
been rapid growth. In the 1950's, propelled by a
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large increase in the money supply and government
investment and protected by subsidies and import
controls, industrial output nearly tripled. The
range of industrial products was broadened substan-
tially, the share of industrial products in total
exports was increased from 53 percent in 1952 to 65
percent in 1960, and real. per capita national income
nearly doubled. Of course, this growth was in part
illusory; much of the new capacity created could be
operated only under a continued policy of easy credit
and broad import restrictions.
5. The rapid expansion of investment credits
and of consumer incomes created strong inflationary
pressures. The government relied on a substantial
degree of direct price control in the nonagricultural
sector to suppress inflation. Prices in agriculture,
however, generally were allowed to rise in an effort
to stimulate production. Increases in food prices
largely accounted for the average annual increase of
5 percent in the cost of living during 1953-60.
Quantitative controls were imposed on most imports,
but the heavy dependence of industrial growth on
imports of raw and semifinished materials and capital
equipment still created large cumulative deficits in
the balance of payments. These deficits were financed
by foreign credit, largely from the West.
6. By the Farly 1960's, inflationary pressures
and balance-of-payments problems forced the govern-
ment to adopt a deflationary policy. Beginning in
1961, restrictions were placed on investment and con-
sumer credit, on the use of enterprise funds, and on
wages. In addition, the dinar was devalued; a single
exchange ratio was adopted in place of multiple
exchange rates (although export subsidies were re-
tained) ; and a tariff system was instituted. Under
the impact of these measures the rate of growth of
industrial output was cut from 14 percent in 1960 to
about 7 percent in 1961 and 1962.
7. The slowdown in growth and a recovery in
the foreign payments balance in 1962 prompted the
government to ease restrictions somewhat in the second
half of 1962. Then in 1963, with revival well on its
way, the government began pushing the economy again.
An expansionary credit policy and a more lenient tax
policy led to a rapid upsurge in demand, which in 1964
resulted in renewed inflationary pressures and a
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severe balance-of-payments crisis. Dwindling
opportunities to obtain new foreign credits and
large repayment burdens from past credits forced
the regime to retrench once again. A new defla-
tionary program was launched beginning in mid-1964,
followed by a far-reaching economic reform adopted
in July 1965.
8. First of all, the new program involved
expedient measures to halt inflation and redress the
balance of payments. The growth of the money supply
was cut sharply by a tight credit policy that re-
strained investment and consumer spending. The
government also held back its own investment program
and froze 20 percent of enterprise investment funds.
A general freeze on industrial prices was levied in
March 1965. This was followed by a price reform com-
bined with devaluation of the dinar in July 1965,
which brought Yugoslav prices closer to those in
world markets.
9. The price reform was primarily responsible
for the 33-percent increase in the cost of living in
1965; about 90 percent of industrial prices were re-
controlled after the increases prescribed by the reform
had been effected. The restraints on domestic demand
and prices, reinforced by direct controls on nearly all
imports and aided by increasing earnings from (tourism,
resulted in small surpluses in the balance of payments
on current account in 1965 and 1966 -- the first since
the break with the Cominform in 1948. Moreover, foreign
creditors were asked, and many consented, to defer
Yugoslav debt repayments, and Yugoslavia was able to
obtain new credits, including a standby credit from
the International Monetary Fund (IMF), in support of its
reform program.
10. The program also included measures intended
to correct some of the basic imbalances and ineffi-
ciencies in the economy. The price reform raised
agricultural and raw materials prices relative to
prices in manufacturing in order to stimulate the
growth of agricultural output and force increases in
efficiency in manufacturing. Enterprises were
exposed somewhat more fully to international competi-
tion by a reduction in customs tariffs and by the
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abolition of most export subsidies in 1965. At the
beginning of 1967 the government removed direct
controls on most imports of fuels, raw materials,
and semifinished industrial products, and relaxed
quotas on imports of machinery and some consumer goods.
Steps were also taken to shift the financing of
investment from political bodies to banks and enter-
prises and to lift most restrictions on the authority
of enterprises and banks to engage directly in foreign
trade. Finally, a law adopted in mid-1967 permitted
foreign investment on a partnership basis with. Yugo-
slav firms in the hope of attracting Western capital
and know-how and establishing new export outlets.
11. By 1967 the deflationary program had largely
succeeded in enforcing greater price stability. As
shown in the accompanying table, industrial wholesale
prices increased by only 2 percent in 1967 compared
with 11 percent in 1966. The cost of living rose by
6 percent in 1967 compared with 24 percent in 1966;
most of the increase in :967 resulted from hikes in
rent and in the prices of other services which were
enacted at the beginning of the year. Banner years
in agricultural production in 1966 and 1967 were re-
flected in a. 3-percent dec.L.ine in agricultural pro-
ducers' prices in - 1 , 9 6 7 . About half of the industrial
prices at both the wholesale and the retail levels
had been freed from control by the middle of 1967.
12, The regime's program was expected to lead to
a temporary drop in the rate of increase of indus-
trial output. The government, however, did not antici-
pate the extent to which enterprises and consumers
would be affected by the deflationary program and by
increased foreign competition. Investment declined
by almost 30 percent in real terms during 1965-67 --
far more than the government had expected. Construc-
tion fell by 30 percent during the same period,
leading to marked slowdowns in the output of building
materials, steel, and industrial machinery. Although
personal incomes ccnti.nued to increase, except for a
brief period following the price reform in 1965, con-
trols on consumer spending led to a slowdown in the
production of clothing, leather goods, footwear,
furniture, and other consumer manufactures. Moreover,
the liberalization of imports in 1967 encouraged
enterprises and consumers to substitute foreign for
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Yugoslavia: Impact of Economic Policy
1964-68
Percentage Change
from Previous Year Percentage Change
from Jan-Jun 1967
1964 1965 1966 1967 to Jan-Jun 1968
Production
and employment
Gross national
product 11 2 8 2 N.A.
Industrial output 16 8 4 -Negl. 4
Real gross
fixed investment 15 -14 -2 -13 7.6
Average real personal
income 12 2 11 7 2 a/
Industrial wholesale
prices 5 14 11 2 0
Agricultural wholesale
prices 24 43 16 -3 -3 a/
Cost of living 12 33 24 6 4
Total imports 25 -3 22 8 0
Total exports 13 22 12 3 -6
Hard currency imports 23 -4 13 21 0
Hard currency exports 7 9 23 9 3
a. January-Apri Z.
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domestic products, which further aggravated the slow-
downs in the steel, machine building, and consumer
goods industries and added chemicals and wood products
to the list of depressed industries.*
13. The end result of these developments was an
unintended stagnation of industrial output and a
sharp rise in unemployment. Producers' inventories
piled up at an accelerated rate, increasing by a
total of 82 percent during 196 5-6 7 . The rate of
industrial growth plunged from an increase of 16 per-
cent in 1964 to an actual decline in output in 1967.
Industrial employment dropped during the same period
by 3 percent and the total number of registered un-
employed** climbed from 228,000 at the end of 1964 to
318,000 at the end of January 1968. In addition, the
liberalization of imports led to an unforeseen upsurge
in hard currency imports in 1967, which, together with
lagging hard currency exports, wiped out earlier gains
made in 1965 and 1966 in the hard currency trade balance.
At the same time, imports from Communist countries
declined, resulting in an unwelcome trade surplus on
clearing account.
14. Some industries, such as petroleum, nonferrous
metals, electrical goods, shipbui lc:ing, rubber, and
paper, were able to weather the recession fairly well
and .. iintained annual rates of growth between 3 and
13 percent. The coal industry suffered the greatest
drop in output -- a 14-percent decline during 1965-67.
This decline reflects an accelerated substitution of
oil for coal in industry and households as a result
of the price reform; coal prices increased by 54 per-
cent during 1965-66 while petroleum prices dropped by
5 percent during this period. Oil production expanded
by 30 percent during 1965-67.
** This measure understates the actual number of un-
employed; a survey published in April 1968 gave an
estimatc of 422,000 unemployed, or about 4 percent of
the labor force. Under US or other Weston practice
the figure would doubtless be higher.
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15. The deflationary program and price reform
drove some unprofitable firms out of business and
prompted others to merge and to specialize in order
to cut costs. In general, however, the reform and
deflationary measures did not produce the desired
increases in industrial efficiency. By 1967, in
fact, the deflation probably had begun to impair
productive efficiency. Investment in modernization
in 1967 represented less than one-quarter of total
investment compared with the planned objective of 53
percent for the period 1966-70. Labor productivity
grew only 1.4 percent in 1967 compared with an average
annual increase of about 5 percent during the preceding
four years.
16. The industrial stagnation triggered an unpre-
cedented barrage of public criticism, mainly centered
in Croatia and Slovenia. Economists and businessmen
objected in particular that the government's new
liberalized trade system had done little to strengthen
incentives to export. They also accused the govern-
ment of issuing misleading reports on the state of
the economy in defense of its policies. These
criticisms were accompanied by a mixture of demands
from industry -- for increased protection, lower taxes,
easier credit, and permission to retain foreign
exchange earnings.
17. Spurred by these criticisms, the government
in late 1967 made an about-face in economic policy
with the objective of reviving growth in 1968. The
goals were to increase industrial production and the
national income by 3 or 4 percent in 1968 and total
employment by one percent. Gross investment was
expected to increase by 8 percent, or about double the
increase forecast for the national income. To
accomplish these objectives, the government loosened
credit terms for exports and domestic sales of equipment
and consumer goods. Tito's advisers hope that the
planned expansion of housing construction and automobile
production will provide outlets for the use of personal
savings deposits .
18. At the same time, the government has taken
steps to hold the line against inflation and balance-
of-payments deficits. Personal incomes have been
frozen until the end of 1968 in service sectors such
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as banking, trade, and insurance, where the most rapid
increases in wages have been occurring. Average
money incomes for the entire economy are expected to
increase by only 6 percent in 1968, compared with an
increase of 15 percent last year. Moreover, the
government has recontrolled over 10 percent of the
previously liberalized imports -- particularly products
of industries, such ea iron and steel and chemicals,
that were hardest hit by increased foreign competition.
19. In addition, the government. in July 1968
stopped the import of consumer goods from hard currency
countries until September 1968, owing to a shortage of
foreign exchange. The government hopes that the rise
in imports of goods and services can be held to 7 to 8
percent and that exports can be boosted by 7 to 10
percent in 1968. The regime also predicts a reduc-
tion in the hard currency deficit and hopes to
whittle down the Yugoslav surplus on clearing acc-unt
which has been accumulated in Eastern Europe.
20. Judging from data for the first half of 1968,
these policies have taken effect. After a stagnant
first quarter, industrial production began to rise
and registered a 4-percent increase in the first half
of 1968 compared with the same period in 1967. The
only branches that have not increased their output
over the first half of 1967 are the machinery and
equipment, textile, leather and footware, rubber,
and food industries. Investments also have turned
up, increasing by 16 percent for the first half of
1968 over 1967, chiefly in manufacturing and mining.
Employment, down by one percent compared with the
first half of 1967, still has not responded to the
revival.
21. Imports have been held at the same level as
last year, while exports dropped by 6 percent during
the first half of 1968, so that the overall trade
deficit has continued to increase. Higher tariffs
in EEC countries and the British devaluation of the
pound have caused a decline in Yugoslav sales of
meat and other agricultural goods to hard currency
markets. On the other hand, exports of industrial
raw materials and manufactures to hard currency
countries have recovered from last year's poor show-
ing, partly offsetting the decline in agricultural
exports. Hard currency imports have been held at
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about last year's level. Thus the hard currency
trade deficit has improved slightly from the level
of about $275 million in the first half of 1967.
22. The revival clearly shows the effect of the
greater import protection given, for example, to the
iron and steel and chemical industries. These
industries, together with shipbuilding, construction
materials, and electrical products have led the
advance thus far. Demands for increased protection
now are being heard from other industries, notably
the metal products (largely machinery and equipment)
industry, whose production has continued to drop
since 1965. Hurt first by the drop in investments,
this industry since 1967 has been suffering from
increasing imports of better quality equipment under
favorable credit terms. Spokesmen for this industry
complain that they cannot grant the same credit
terms as foreign producers. Primarily, however,
they seem to be angling for increased administrative
control of machinery imports, which would be another
step backward from the avowed aims of economic
policy.
Prospects
23. The revival in industry should continue
through most of 1968. The present official forecast
is that industrial output will grow by 5 to 6 per-
cent, or about 2 percentage points above the original
estimate. The rise in inventories of finished goods
has slackened, and enterprises in some sectors
appear to have begun to work down excess stocks. The
temporary ban on hard currency imports of consumer
goods and the recent tightening of import controls on
some textiles may give a lift to the output of light
consumer goods which continued to stagnate during
the first half of 1968. Overall economic growth,
however, may be threatened by the probable drop in
agricultural output as a result of the recent drought.
The poor crop forecast and the problems encountered
in exporting agricultural products have dimmed pros-
pects for any significant improvement over last year's
estimated deficit in the balance of payments of $80
million on current account. In addition., receipts
from tourism are now expected to increase only
slightly over the 1,967 level.
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24. The present regime believes that the best
course for Yugoslav development is to build up lines
of production that are competitive in world markets,
particularly hard currency markets. In the past,
Yugoslavia was able to rely on expanding exports of
agricultural products and industrial raw materials
to hard currency countries and on substantial Western
credits in order to obtain the imports needed for
industrialization. Now the Yugoslavs find it diffi-
cult to maintain a growing hard currency market for
agricultural products. Also, credits no longer pre-
sent a significant net addition to resources, be-
cause of repayment commitments on existing indebted-
ness. Thus if Yugoslavia wants to continue to buy
high-quality Western equipment and other products
and also keep a balance in its trade between West
and East, it must be able to rely on increased
exports of manufactures to hard currency countries.
25. The regime believes that the best way to
increase the competitiveness of Yugoslav manufactures
is through greater exposure to foreign competition
and a freer operation of market forces at home. The
regime, however, periodically will have to retreat
from these policies because the Yugoslav economy and
its institutions still are highly vulnerable to mal-
adjustments in prices, in foreign trade, and in the
pattern of resource distribution, particularly when
the economy is left more or less to its own devices.
The government cannot rely on domestic competition to
police prices and stimulate efficiency because the
small size of most Yugoslav markets breeds monopolies.
26. Freer foreign competition cannot be consistently
used as a substitute for domestic competition because of
Yugoslavia's chronic adverse trade balance. Foreign
competition, in any event, might not be an effective
antidote for inflation; some relatively open Western
economies have run into inflationary problems. More-
over, the government cannot give a blank check to
enterprise management to set prices and distribute
enterprise income. Management under the influence of
Yugoslav workers' councils tends to be inflationary.
The concern of workers for maximizing present earn-
ings puts pressure on prices and stifles any incen-
tive for managers to undertake forward-looking proj-
e(.t;. Finally, the banking system still is influenced
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by local and regional vested interests which hamper
the flow of capital to the more efficient and profi-
ab a areas of the economy.
27. These problems will continue to force the
government to intervene periodically with controls on
prices, imports, investments, and incomes. As in
recent years, the government probably will use price
controls and a selective policy to prod enterprises
to improve efficiency. When the hard currency defi-
cit becomes unmanageable, however, the quest for
efficiency will be sacrificed by increasing protec-
tion and by increasing trade with Communist and less
developed countries under bart.-,r arrangements.
26. As long as Tito remains in power, the govern-
merit will stress efficiency. Yugoslavia should be
able to slowly and sporadically uncover new lines of
exports and modernize the more competitive areas of
the economy su.;n as food processing, wood products,
and nonferrous metals. Foreign investment could help,
but it probably will be a long time before substantial
foreign investment can be attracted. The only major
deal involving a Western country that has been con-
cluded thus far under the new law i. an agreement
between Fiat of Italy and Zastava, the Yugoslav auto-
mobile factory initially set up by Fiat. It is
doubtful that the reg-'me will be either willing or
able to remove instead of suppressing the unstable
features built into the system. Unfortunately,
under the present setup, a further decentralization
of economic authority to the enterprises and banks
may require the government to intervene more frequently
in the economy. The constant changes that now are
made in government regulations already must have a
demoralizing effect on enterprises.
29. After Tito leaves the scene, however, the
progress in liberalization that has been made thus
far could go down the drain. Tito has personally
carried the latest reform into effect and has purged
many of the conservative opponents of the program.
Nevertheless, the tendency to oppose government
economic policies is increasing. For example, the
governments of Slovenia and Croatia in 1967 questioned
the right of the federal government to impose a 26-
percent limit on payroll taxes. Croatian economists
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and. businessmen have continued to attack the govern-
ment's analysis of trends in the economy. The student
uprisings in June 1968 denounced the drop in employment
opportunities brought on by the government's deflation-
ary program and elicited an admission by Tito that all
was not well with the reform.
30. Tito's successor, lacking his personal
influence, probably will have more of a problem with
conflicting demands from regional and industrial
interests on questions of resource allocation and
the incidence of reforms. Without strong central
leadership, regional political and economic influences
and conservative opposition could be strengthened
enough to thwart the economy-wide thrust of the
reform movement and derail the current policy of price
stabilization and moderate growth. There is little
danger that the system would revert to a Soviet-type
command economy. Weak or conservative leadership,
however, could bring about a return to a highly protec-
tionist policy and an emphasis on growth for growth's
sake.
CONFIDENTIAL
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010055-0