THE ROLE OF TOURISM IN THE YUGOSLAV ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010072-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 27
• Document Creation Date: December 22, 2016
• Document Release Date: February 1, 2010
• Sequence Number: 72
• Publication Date: July 1, 1971
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Confidential
ER IM 71-120
July.1971
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WARNING.
This document contains information 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.
GROUP I
Excluded f'.. nulon,oI c
down~~odinp and
dnclout6colion
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CENTRAL INTELLIGENCE AGENCY
Directorate of. Intelligence
July 1971
INTELLIGENCE MEMORANDUM
THE ROLE OF TOURISM IN THE YUGOSLAV ECONOMY
Introduction
1. Ten years ago, Yugoslavia was earning $14 million from fewer
than one million foreign tourists. Today the take is $248 million from five
million visitors. As Yugoslav tourist officials have long known, a long
coastline and mild weather make the country a natural for tourism. In the
early 1960s, President Tito "officially" decided to push tourism to earn
much needed foreign exchange. This is why 1970 was disturbing - tourist
earnings rose by only 2.5%, breaking a string of annual increases that had
not fallen below 17% since 1960 and had averaged over 30%. This
memorandum will examine Yugoslavia's tourist boom and assess the recent
problems and the potential of the industry in view of its vital role in the
Yugoslav economy.
2. In 1970, Yugoslavia's tourist boom came to rest against a
bottleneck in capacity, problems in financing new investment, and some
unfavorable publicity from abroad. These problems made it impossible to
reach the $350 million earnings mark predicted for 1970 and cast doubt
on the latest five-year forecast, which showed earnings of $750 million in
1975. In view of the industry's problems, tourist earnings by 1975 will
probably be closer to $500 million, compared with $248 million in 1970.
And if the outflow of Yugoslav travelers continues to increase, net earnings
probably will not exceed $350 million by 1975.
3. The Yugoslavs cannot afford a prolonged slowdown in earnings
from tourism. Net earnings have been covering about 20%-25% of
Note: This memorandum was prepared by the Office of Economic
Research.
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Yugoslavia's chronic trade deficits in recent years. Not only have these
receipts permitted more imports than exports could finance, but without
them the government's efforts to liberalize the economy and open it to
world trade would be hamstrung by the need for excessive import controls.
Tourist earnings have bought time for Yugoslavia to upgrade its export
potential by attracting foreign investment and developing more marketing
know-how.
4. Beyond 1975, the outlook is brighter. The United Nations'
Adriatic projects will begin yielding results by the end of the 1970s. In
addition to benefiting the already developed Croatian coast, these projects
involve winter activities, stretching Yugoslavia's tourist season from a
summer-only proposition to a year-round event. These programs also will
give a lift to one of Yugoslavia's most backward regions Montenegro -
which will take some of the sting out of charges that investment in tourism
is biased exclusively toward the more developed republics.
5. In the meantime, the Yugoslavs will have to solve much more
than capacity and investment problems. In addition to chronic inflationary
pressure, there have been complaints abroad about unsafe air travel and
bad hotel and restaurant service. Moreover, tourists have resisted the poor
assortment of goods in the Yugoslav market. Taking care of these complaints
will spell the difference between a one-time visitor and a permanent fan
of Yugoslavia's tourist attractions.
Discussion
The Tourist Boom
6. Tourism has become the largest single item in world trade, growing
at a rate in excess of 10% per year. For fortunate countries endowed with
suitable topographic and climatic resources and a historical or cultural
mystique, tourism has become a leading industry - absorbing higher
employment and increased investment in private enterprise and the social
infrastructure, and earning large amounts of foreign exchange. One
Cinderella story is that of Spain, with receipts from tourism in 1969 of
$1.3 billion, or $40 per capita. Another, on a smaller scale, is Yugoslavia,
with receipts of $242 million, or $12 per capita in 1969. In the ten years
after 1959, gross earnings increased nearly 18 times and Yugoslavia
expanded its share of the European tourist market from insignificance in
the 1950s to 3%.
7. In the early 1950s, Yugoslavia was as little interested in tourism
as tourists seemed to be in coming to Yugoslavia. Domestically, the stress
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was on post-war reconstruction and the development of the industrial sector
of the economy. Europe too was preoccupied with restoring the pre-war
standard of living. It was not until 1954 that as many tourists arrived in
Yugoslavia as in 1939.
8. By 1956 the Yugoslav tourist industry was beginning to recognize
the market's potential. The industry benefited from increased investment
in hotel and catering enterprises and in transportation facilities. By 1962,
however, earnings from tourism had reached only $32 million.
9. In 1962 the tourist industry received solid support from President
Up to now our industry has not provided much in the
way of foreign exchange so to reduce our [trade] deficit. On
the contrary, this deficit has become bigger and bigger every
year, and we have neglected certain sectors in our social and
economic life. This applies first of all to tourism. We have
always looked upon tourism as something secondary, which was
not important. We said: if someone wants to come, our Adriatic
Sea is beautiful, let them come and when they see it, they
will come back. That won't work anymore. We must take a
different view of tourism and change our criteria ... .
10. Yugoslavia always had offered beaches and sunshine at low price.
Now Tito called for improved access routes, new hotels and restaurants,
and "everything else that will bring foreigners to our sea." The speech
sparked a boost in investment outlays from an average of $9.5 :million in
1959-61 to $27.6 million in 1962-65. Advertising campaigns were mounted
and new contacts for group tours were made with foreign travel agencies.
Moreover, Tito's official backing cleared away some of the political
uncertainty. Many Westerners undoubtedly would be intrigued by a trip
to Communist Yugoslavia; now it was nice to know that they indeed were
welcome.
11. The tourists began coming - the annual increase jumped from'
100,000-200,000 during H157-6! to 400,000-500,000 in 1963-65. By 1970,
Yugoslavia was entertaining S million tourists a far cry from the 500,000
that were coming in the mid-1950s (see the chart).
Tourism and the Domestic Economy
12. The fact that tourism accounts for only 2% of Yugoslavia's social
product and 3% of employment in 1969 greatly understates its role in the
economy. The rapid growth of the industry has been a spur to employment
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Yugoslavia: Foreign Visitors
(thousand persons)
and output in other sectors - electric power, building materials,
construction, transportation, agriculture, and handicrafts. And tourism has
been one industry that had added little, to Yugoslavia's import burden -
purchases of foreign equipment for the tourist industry, for example, have
averaged less than $1 million in recent years. Of course, like rapid expansion
in any sector, the tourist boom probably has contributed to inflation by
pressing on available supplies of building materials, agricultural products,
and investment funds. For one thing, investment in tourism in 1969 was
nearly 70% of its social product compared with an average share of less
than one-quarter for the economy as a whole.
13. The distribution of foreign tourists and their spending has tended
to reinforce regional economic inequalities in Yugoslavia. Almost 90% of
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foreign tourists in 1969 went to the more developed northern republics,
nearly 60% to Croatia alone. Montenegro and Bosnia-Hercegovina accounted
for almost all of the 10% of tourists that went to the less developed. areas.
There has been very little change in these shares in 10 years. With the
exception of Montenegro, the less developed areas are shut off from the
sea, away from the mainstream of tourism (see the map).
Yugoslavia
Selected Tourist Areas, 1970
0
Number of tourists
?
12,000-37,500
37,501-125,000
0
125,000-250,000
.a"
Over 250,000?
Republic boundary
Autonomous area boundary
811882 0.71
14. The policy of banks in granting investment credit has perpetuated
the inequalities. In view of the scarcity of investment funds the banks
followed a policy of risk minimization. Credit preference was given to large,
reliable organizations. A minimum size of 1,000 beds was required, but
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D L\_
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the average capacity of firms receiving credit was over 3,000 beds. Since
Croatia had the largest number of organizations of suitable size, the Croats
naturally received most of the investment; in fact their share jumped from
44% in 1966 to 64% in 1969.
15. Not only has tourism contributed to the widening economic gulf
between the have and have-not republics, but it also has been an added
source of regional conflict. The Croats, as the leading tourist earners, want
to retain foreign exchange earnings for use in their area. They argue that
with the help of tourism they account for 38% of Yugoslavia's foreign
exchange earnings but account for only 26% of imports. The less developed
regions are generally in favor of the current system under which a large
part of foreign exchange is surrendered to, and redistributed by, the national
bank. They argue that without the foreign exchange they will fall further
behind the developed regions.
Tourism and the Trade Balance
16. More crucial to the economy than the domestic role of tourism
is its impact on the balance of payments. In this respect the growth of
tourism has been essential. Yugoslavia couples a high propensity to import
with a marginal export performance by industries very sensitive to world
market fluctuations. The product has been a consistent series of annual
trade deficits, resulting in an increasingly heavy debt burden, and a periodic,
need to appeal to foreign creditors for refinancing. The trade deficit reached
a record $1.2 billion in 1970.
17. There are three ways out: (1) permanent import controls, (2)
a large inflow of direct foreign investment to reduce credit needs and provide
export outlets, or (3) a rapid increase in invisible earnings. Import controls -
when they have been effective - have seriously impeded the growth of
the domestic product, and they are not in line with efforts to open the
Yugoslav economy to world trade. Foreign investment is in line with this
effort, but it has been slow in coming. In any case, the impact of foreign
investment on exports will be felt only slowly.
18. The three largest components of Yugoslavia's invisible account
are transportation, workers' remittances from abroad, and tourism. Although
transportation earnings are considerable, they largely play a passiv,-: role,
moving in line with, or behind, trade activity. From 1965 to 1969, for
example, net transportation earnings rose by 37% while total trade increased
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50%. J Workers' remittances have grown dramatically in recent years, by
129% from 1967 to 1969. Government efforts to encourage savings by
Yugoslavs abroad had unexpected results in 1970 - workers' remittances
more than doubled, reaching $439 million compared with $204 million in
1969. Unemployment at home has forced the government to tolerate and
even encourage the outflow of workers. Now, with over 700,000 Yugoslavs
employed abroad - more than 7% of the economically active population -
a campaign has been started to induce workers to stay at home and return
from abroad. Barring prolonged re;ression, the growth of remittances
probably will begin to slow down ir: the next few years.
19. During the past 10 years, tourism has played the most consistent
role in helping to offset Yugoslavia's craving for imports and in buying
the time necessary to create solid export industries. As Tito puts it: "The
foreign exchange which we earn through tourism is the cheapest foreign
exchange from our standpoint, since we obtain this exchange without
releasing any of our own resources to foreign countries; rather, in this way
we sell those commodit;.,I~s which otherwise we would have to export at
a discount." During the 1960s, the rate of growth of gross tourist receipts
was nearly three times that of commodity trade turnover, and in 1969
these receipts represented a 16% addition to commodity exports. Net tourist
earnings covered 25.6% of the trade deficit in 1969 compared with only
2%-3% in 1959-61. The progress of tourism in the Yugoslav foreign trade
sector is reflected in Table 1.
20. An offset to tourist earnings has been the outflow of Yugoslav
tourists to foreign countries - mainly to hard currency areas - rather than
to the Adriatic coast. Expenditures on tourism in 1969 totaled $74 million
and decreased gross receipts by 30%. Outflows have been increasing faster
than recein+s since 1965, in spite of longstanding restrictions on the amount
of dinars tnat can be taken out of the country and persistent efforts to
promote domestic tourism.
21. One reason for the rising outflow is the rapid growth of foreign
3xchange accounts in Yugo3lav banks. These accounts were authorized in
the hope of attracting the deposit of earnings by workers employed abroad.
Another source of foreign exchange in the hands of the population has
been "private clearing" - that is, private sales of foreign exchange for dinars.
1. Earnings derived from the transportation of passengers by domestic
carriers (transit) have been an additional source of foreign exchange. The
growth of these earnings i? induced by increased tourism, but has been
slower than that of gross tourist receipts. Earnings can be expected to
increase faster in the future because of recent massive investment in the
transportation network.
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Table. l
Yugoslavia: Tourist Earnings and the Tzade Balance
Gross Tourism Net Tourism as
Trade Gross Net as a Share of a Share of the
Exports Imports Balance Tourism. Tourism Exports Trade Deficit
1959
.476.6
687.2
-210.6
12.8
6.6
2.7
3.1
1960
566.2
826.4
-260.2
14.3
7.0
2.5
2.7
1961
568.9
910.3
-341.4
20.0
8.0
3,5
2.3
1962
690.5
887.8
-197.3
32.0
23.0
4.6
11.7
1963
790.3
1,056.6
-266.3
53.0
44.0
6.7
16.5
1964
893.1
1,323.2
-430.1
69.0
56.0
7.7
13.0
19b5:
1,091.5
1,287.9
-196.4
81.0
63.0
7.4
32.1
1966
1,220.1
1,575.4
-355.3
117.0
72.0
9.6
20.3
1967
1,251.7
1,707.4
-455.7
150.0
98.0
12.0
21.5
1968
1,263.7
1,796.8
-533.1
187.7
136.6
14.9
25.6
1969
1,472.7
2,127.1
-654.4
241.5
167.8
16.4
25.6
1970
1,678.9
-2,871.6
-1,192.7
247.6
N.A.
14.7
N.A.
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Million US $
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1967 and $98.3 million in 1968. Estimates for 1965-69 are shown in the
accompanying tabulation.
official tourist receipts caused by private clearing equaled $90 million in
of 12.5 to 1. Given the disparity, individuals dealing w;.th tourists made
a quick profit by exchanging currency at a rate somewhere in between
or by accepting foreign currency rather than dinars as payment for goods
and services. The Yugoslav government has calculated that the leakage from
this market at a rate of It, to 1, compared with the official exchange rate
rate at which enterprises exchange currency on the so celled "gray market."
Previous to the recent devaluation, dinars were exchanging for dollars on
market rate for dollars is unknown, it can be assumed to approximate the
Although private clearing is illegal, enforcement is lax, and banks in their
quest for foreign exchange do not ask the origin of funds deposited. Banks
utilize these deposits, subject to a reserve requirement, as a basis for making
domestic loans and to satisfy legal restrictions on the amount of foreign
exchange they must possess in order to obtain credit abroad. Citizens use
these deposits either for travel, circumventing exchange restrictions, or,
perhaps, to engage in black market operations. The main compulsion for
Yugoslavs to navel is to purchase goods that are in short supply domestically
or of inferior quality - automobiles, washing machines, and refrigerators.
22. The only method of acquiring foreign exchange open to the
citizen who remains at. home is through private clearing. Although the black
1965 1966 1967 1968 1969
. Estimated pri-
vate clearing
Adjusted net
which represents 25% of the hard currency trade deficit in that year.
Estimated net earnings from Western tourists equaled $145 million in 1969
to $1.1 billion in 1970. Fortunately, the bulk of tourists come from the
West and nearly all of these come from hard currency areas. As shown
in Table' 2, Western tourists accounted for 83% of the total number in
1969. Of these, 95% came from Western Europe and the United States.
rose steadily from $436 million in 1967 to $574 million in 1969 and jumped
Million US $
tourist re-
ceipts
44.6 64.6 90.0, 98.3 132.8
107.6 136.6 188.0 234.9 300.6
23. The impact of tourism on the balance of payments is primarily
important for Yugoslavia's hard currency trade. The hard currency deficit
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Western Europe 84.8 75.2 5.07
Yugoslavia:
Share of Average
Total Length
Tourists of Stay
(Percent) (Days)
Free World countries 94.4 82.6 4.70
West Germany 24.7 23.5 6.63
Italy '9.9 16.0 2.78
Austria 21.9 12.5 6.02
Benelux 5.1 5.8 5.00,
France 7.7 5.7 3.41
Great Britain 7.9 4.7 4.86
Scandinavia 3.7 2.5 5.52
Switzerland 3.2 2.5 4.65
Other 0.7 2.0 3.17
3.8 3.4 2.32
5.8 4.0 2.44
5.6 17.4 ' 4.86
Czechoslovakia 0.5 9.6 6.01
Hungary 0.6 2.6 2.93
USSR 0.5 1.6 2.74
Poland 1.6 1.3 4.27
East Germany 1.9 1.2 3.34
Romania 0.2. 0.6 1.81
Bulgaria 0.3 0.5 2.07
Total 100.0 100.0. 4.72
Communist countries
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Table 2
Tourists, by Country
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24. The Western countries most important to Yugoslav tourism are
West Germany, Italy, and Austria. In 1969 these countries accounted for
52% of all foreign tourists. West Germans do a lot of camping and many
Austrians stay with relatives - both spend more time and less money per
day in Yugoslavia than do the Italians. Since many Italians tend to visit
Yugoslavia to purchase bargain goods, as well as to wine and dine at
relatively expensive Slovenian resorts, their daily expenditures exceed the
German-Austrian average by 30%.
25. Tourists from Great Britain and Scandinavia have both long stays
and high daily expenditures. Although Great Britain's foreign exchange
restrictions on travel have hurt all tourist countries, Yugoslavia has been
able to reduce the impact by arranging low-cost package tours. Scandinavian
tourists have been coveted but their numbers are small because of the travel
distance involved.
26. Travelers from the United States stay the least and spend the
most per day. Most Americans, however, confine themselves to central
Europe or at best make Yugoslavia a one- or two-day stop on their way
to Greece. Two- and three-week package tours covering both Greece and
Yugoslavia have become increasingly popular with Americans and are a step
forward even though Yugoslavia still gets the short end of the stay. Average
daily expenditures of Western tourists from a 1967 survey of seaside resorts
are summarized in the accompanying tabulation. (See Table 2 for length
of stay in 1969.)
US $
Austria
6.48
West Germany
5.84
Italy
8.00
Great Britain
8.56
Scandinavia
9.04
United States
12.96
27. Tourists from Communist countries hav:: -1ayed a small role in
terms of earnings as well as numbers. In 1969, travelers from the USSR
and other countries of the Council for Mutual Economic Assistance (CEMA)
accounted for 17% of the number of tourists and 14% of earnings. The
share of Communist tourists has risen since the early 1960s, when
Yugoslav-CEMA relations thawed and travel restrictions were eased. Given
the scarcity of permits to visit the West, Yugoslavia has been an optimal
? choice for Communists with the means to travel. They have found not
only a low-cost recreational playground but also an opportunity to buy
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Western products which are hard to find at home. The Czechs - accounting
for 55% of all Communist tourists in 1969 - have taken the most advantage
of these attractions in the past. However, the influx of Czech visitors --
and with it the Communist share - dropped by nearly 60% in 1970. As
a result of thc 1968 invasion of Czechoslovakia, approximately 30,000
Czechs failed to return from their holiday in Yugoslavia during 1969. As
a result, the Czech government imposed foreign exchange restrictions on
travelers to Yugoslavia. The decrease of Czech tourism was one of several
reasons why 1970 was not so good a tourist year as it was expected to
be.
The Problem Year - 1970
28. Early estimates of the 1970 inflow of foreign exchange forecast
earnings at X350 million. It was to be another record year and would come
very close to fulfilling the original five-year development plan target. This
was not to be the case. In August, it was noted that the number of foreign
tourists in July was 7% less than in 1969. Moreover, the total number of
nights spent in 1970 through July was 3% lower than the corresponding
period in 1969. Hope had been held out because earnings of foreign
exchange by midsummer were estimated to be running 30% higher. But
by the end of 1970, tourist earnings had gained only $6.1 million -- 2.5% -?
over 1969.
29. There was no single reason for the slowdown. In addition to the
decrease in Czech visitors, the flow of Western travelers was impeded by
a slowdown in European and US growth rates which caused consumers to
defer expenditure on durable goods and other large outlays such as travel.
Moreover, the German Auto Club mounted an advertising campaign critical
of Yugoslav travel facilities. This was reinforced in the British press with
articles about unsafe air travel.
30. Another factor was domestic economic instability. Average retail
prices rose by 9% in 1970 but average prices of catering services increased
by 16% and of food service alone by 22%. While failing to hold the price
line, the government's deflationary monetary policies created a credit
squeeze - affecting tourism as well as other industries. The tourist industry,
faced with rising building costs, was running out of rooms and the funds
to finish backlogged construction in 1970.
31. The slowdown in tourist earnings in 1970 could not have come
at a worse time - the trade deficit and particularly the hard currency deficit
were at all-time highs. The slowdown, however, has called attention to basic
problems, often concealed by success in the past but crucial to the future
of the Yugoslav tourist industry.
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The Supply Problem
32. Yugoslavia has a more than adequate supply of natural resources
for tourism. Politics and nature have provided Yugoslavia with 2,092 km
of Adriatic coastline. In addition, there are 30 islands in an area of 10
square kilometers or more, plus 730 smaller ones. One of the m^in impulses
to the tourist boom has been the growing preference for a Mediterranean
environment in contrast to the cultural attractions of inland Europe. In
1958 the West European share of international tourism was 38%; by 17'67
it declined to 33%. Simultaneously the Mediterranean share increased from
19% to 24%. Yugoslavia's long coastline offers both clirnate and beaches
comparable to the Mediterranean as well as a number of historical
attractions.
33. A large part of the interior is mountainous and dotted with lakes,
suitable for winter and aquatic sports as well as hunting, fishing, rind
hiking - a favorite pastime of German visitors. Moreover, there are over
300 mineral springs - many not yet developed -- to attract spa-conscious
tourists, and for a lover of antiquity there are Greek, Roman, and Byzantine
ruins.
34. Labor also is abundant. Even though much of the labor is
unskilled, workers can quickly be trained for most duties in the hotel and
catering industry. The quality of the training, however,'' another matter.
Judging from some complaints about service and worker attitudes toward
tourists, some improvement needs to be made.
35. The major bottleneck to development, however, is lagging supply
of accommodations. This is evidenced by the need to secure reservations
far in advance of any seasonal visit, the high occupancy rate at hotels,
and the continual encouragement given to the development of private
lodging and catering services. Yugoslav data show that the better grade hotels
are strained to above capacity in peak months. For example, luxury hotels
on the Adriatic somehow had an occupancy rate of 121% in June 1969.
Average peak occupancy rates in luxury and class A hotels in 1969 are
shown below for sea and mountain resort areas.
Percent of Capacity
June Jul August September
Seaside 97 81 93 80
Mountain 57 77 83 82
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Anotlhc, Indication of Inadequate hotel space is the large market for beds
in private homes or gunnst houses, In fact, the rise of the share of privately
offered beds indicates that the situation has worsened, As shown In Table
3, this s!wre has risen consistently in the 1960s, reaching 40'%, In the lust
few years.
36. The capacity constraints an be traced to early neglect -- It was
not until the early 1960s that tourism could compete on en u;`Ihhal footing
with other sectors for available investment funds. Yugoslavia began the
1960s with only 212,665 beds for both domestic and forn;'.gr' tourism.
Moreover, less than 50,000 of !!lose were found in installations with modern
comforts. Yugoslav planners fad a massive ne;a for facelifting as well
as for new construction,
37. One of' the main problems was the regional allocation of
investmment. At this tittle, most of the new construction and modernization
was located in the larger tourist centers, with some funds also being
channeled into the construction of tourist settlements such as camp?hotc',
with bungalows and other light lodging facilities. On the other hand, there
were strong pressures to funnel funds into the less developed areas -- both
because it would create new income and because it would aid in decreasing
the seasonality of tourism by cxpandin;c the capacity for avf,ot .-nodations
away from the crowded coast. I lowever, the amount of' investment necessary
to establish resorts with as much earning power as those in operation on
the coast would be proportionally greater. There would be no cost benefits,
nor added growth dividends, in the interior regions from being able to
expand upon an ilrsady established nucleus of' tourist activities -- in short,
no "agglomerating economies." For example. transportation can service
many activities at less cost when they are near each other, than, when they
are widely separated. Thus, on economic grounds, major investment on the
non-Adriatic area was resisted as a less than optimal allocation of resources.
Tito had said as much in 1962 when he stressed tourism on the seacoast.
38. The only significant redistribution of investment in the first half
of the 1960s was an increase in funds for the smaller tourist locations along
the Adriatic. This move was successful; the number of tourist places
recording over 20,000 nights spent by foreign tourists increased from 21
in 1957 to 41 in 1961. Much of this increase can be attributed to the
construction of new, modern roads enabling tourists to visit little known
but attractive locations, This policy could have been even more successful
if greater provision: had been made in these areas for catering ah,J or
servicing automobiles.
39. By the mid-1960s, however, there were signs that the construction
of new facilities and the reconstruction of existing ones had not matched
demand. From 1962 to i 966 the number of foreign visitor nights had tripled
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Yugoslavia: Capacity for Accommodation
0072 0
Stock of Pri-
Net Change vately offered
Over Previous Beds as Percent
Year of Total Stock
1959
1960
212,665
254
-
57,508
27
1961
,095
274
71
41,430
82,591
25,083
33
1962
,
5
292
72
20,620
82,997
406
30
1963
,
3
303
19
18,008
87,944
4,947
30
1964
,
2
354
711
10,469
100,915
12,971
33
1965
,
385
40
51,519
125,491
24,576
35
1966
,
9
399
08
30,698
144,609
19,118
38
1967
,
0
432
7
7
.3,671
156,902
12,293
39
1968
,
9
454
33,717
176,032
19,130
41
1969
,096
497
444
21,299
182,395
6,363
40
,
43,348
200,701
18,306
40
Net Change Stock of
Total Stock Over Previous Privately
Year of Beds Year Offered Beds
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and many tourists were forced to choose secondary types of
accommodations - the percentage usage of hotels and "pensions" dropped
from 59.3% in 1962 to 48.017v In 1966,
40. Obviously in),neessed by the sudden wave of tourists, the
government raised its sights In the mid-1960s, The plan for A966-70
projected an income from tourism amounting to $4W million in 1970.
This figure - 77% more than was collected during the entire 1955-65
period - hinged on pla-;s to provide 90,000 to 100,000 now hotel and
motel buds, 80,000 to 90,000 beds in private roams, and 50,000 to 60,000
accomnle;iation spaces in camps. Planned investment In hotels an4, catering
was $370 -nillion, of which $0 million was in foreign loats,A, $53 -lillion
:rom hotel and restaurant organizations, $123 million from batiks and
economic organizations, $52 million from citizens, and $44 million from
internal credits. This, of course, did not include investment for the
development of the necessary infrastructure, nor wa.; ,ry allowance made
for inflation, which by now was it permanent fixture in to economy,
Investment Problems
41. Actual investment during l9C6.70 greatly exceeded the plan,
reaching about $460 million (see. Table 4). Still, less than one-half the
planned number of beds wcrz constructed by 1970. This is not surprising;
the average cost of the construction of a hotel bed had increased from
$2,800 in 1966 to S4,640 in 1970. Using the average of these two
figures $3,720 - the construction of 100,000 beds would have taken the
entire amount of investment planned for 1966.70. llesidcs, if eatin for 1967
are typical, less than one-third of investment actually wln' into new
construction during the period.
42. To achieve the construction plan, substantial foreign assistance
would have been needed. An interview with JoZe Ilrilej, Chairman of the
Federal Committee for Tourism, in January 1966, revealed that S500 million
in credit had been offered, but the country was heavily in debt, and not
in a position to accept. A chief obstacle was the terms of the loans -
8 to 12 years at interest rates avcraging 811%. fly comparison, credit terms
received by other tourist countries were for 15-25 years at interest rates
ranging from 3% to 5 Y~. Yugoslav agencies and enterprises desiring
development loans wanted even more favorable terms - 15 years at 2%.
43. By 1967-68, officials realized that planned earnings of $400
miElion would not be achieved and lowered the figure to S350 million.
It was also realized that achievement of the lower figure would depend
on foreign credits earlier spurned, The solution was to have the banks instcad
of tou*ist organizations borrow from abroad and lend to the tourist industry.
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Yugoslavia: Investment in the Hotel
and Catering Industry and Travel Agencies
by Source of Finance
Million US $
Source
Hotel and catering
enterprises
Other )rganizations
Banks
Social- 'politicaal
co=unities
Total
Eat:emated.
1965
19 6G)
8.9 13.7 15.4 14.1 18.6
0.2 1.1 0.2 0.6 0.9
18.1 14.0 56.6 58.5 117.5
1.2 0.9
N.A.
N.A.
N.A.
6.2 4.9 2.6 N.A.
28.4 34.7 78.4 78.1
139.6 130. 0 f
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And since the ]utter could not borrow under terms which would enable
bunks to repay foreign sources, the government In*ervened and subsidized
the difference in the rates of interest. In effect, about 70'/0 of the total
bank loans for tourism during 1966.70 cane from foreign sources.
44. The government, however, failed to meet its obligation to the
bunks. Only $15 million was paid out of it total of $138 million in interest
owed to the banks. The shortage of funds in many cases caused builders
to halt further construction. After a lively debate a bill was passed in
December 1970 to eliminate the subsidized rate of interest for investment
in tourism. In order to case the impact on building in progress a provision
was negotiated enabling banks granting credits to raise loans abroad without
losing their credit-granting potential or having to make foreign exchange
deposits. Unfortunately, the banks fc'and themselves in a position where
they were unable to Incur further foreign debts. Moreover, the increased
cost of construction created an additional problem and the banks had
exhausted all possibilities for covering the increased expenses.
't'ransportation - it Brighter Spot
45. Improved transportation has been crucial in increasing tour`am
(mainly road, sea, and air transport - foreign tourists make little use of
the railroads). Better transportation facilities have lowered the cost of supply
and have expanded demand by increasing the market area. The expansion
of the highway system has contributed the most in the trunsporIatir)n sector
to the development of tourism. The completion of the Adriatic highway
has been vcty significant in the development of the main costal attractions
of Croatia, while the completion of other highways mean, easier access
41o resorts and spas in other republics. The overall building program was
underwritten by the World Bank and, besides hirJiw1ays, included the
construction of a net of service stations and auto-ca-rmps for use by the
80"%% of the tourists who arrive by privately owned automobiles. The growing
importance of the mobil tourist can be seen in Table 5.
46. Improvements in sea traffic have contributed to the growth of
tourism by opening up coastal islands to foreign visitors, a good example
is the hydrofoil service between Split 'tad the Dalmatian Islands. Also,
improved sea travel `teas increased excursions from the Italiao ports to the
Yugoslav tourist areas.
47. The increase in VI-Ai nuanbcr of airlines and flights serving
Yugoslavia has expanded its market area to tourists from Scandinavia, Great
Britain, and North America. Airports designed to increase the inflow of
tourists have been or are being constructed near every major population
and tourist center. Although described as "modern," the airports cannot
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Yugoslavia: Number of Entries
of Foreign Motor Vehicles
Private
Private
Year
Automobiles
Year
Automobiles
1953
14,337
1962
662,544
1954
2',371
1963
967,415
1955
46,000
1964
1,677,721
1956
81,686
1965
3,569,830
1957
165,404
1966
7,963,202
1958
246,278
1967
10,156,107
1959
336,756
1968
10,490,913
1960
400 675
1969
12,024,325
1961
479,982
1:)70
11,900,000
handle the new Jumbo Jets, but they are adequate for the "bread and butter"
charter craft. With the installation of these new faraities, air traffic has
increased at a high rate. In 1968, Yugoslav airports handled 1,116,000
passengers and 1 ,572,000 in 1969. Preliminary estimates for 1970 arc
2,248,000 passengers. or 431;%, above 1969.
48. A nv.,Jor explanation for the increase in Yugoslav tourism has been
its low cost. r'Ior this reason the preponderance of tourists have been in
the middle and lower income bracket:, although even the more affluent
have t,,ndcd to substitute Yugoslavia for the more expensive tourist areas.
or to choose it for a second vacation. Like improved transport, the lower
prices have helped to expand the market area. In 1969 the average tourir~t
spent S6.40 per day for food and lodgings. Ilotel guests spent more (S9.68
per day) time those staying in tourist colonies ($7.76 per day), Ilowevcr,
many tourists preferred to stay in cheaper private lodgings or in camps
where they got by with an average of $5.52 and $3.84 per day, respectively.
49. YuFo7";, efforts to maintain coin pciitive iourisi prices have becn
periodically r;aallcn cd by a pcrsis'cnt ,inflation. Price indexes t'6: tourist
scrviccs Crc eivcn in Table 6. To counter increased pticcs and growing trade
deficits. Y~boslavia hr'y undertaken three deva;u;ations in the past 10 years,
in 1961, 1,965. and 1971. Tourist industry officials have generally supported
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Yugoslavia:
Price Indexes
1968
= 100
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
Cost of living
38
41
46
48
54
72
89
95
100
108
Retail prices
43
47
50
52
57
73
90
96
100
107
Producer prices
69
72
72
72
76
88
98
100
100
103
Elements and mate-
rials for building
64
Caterihg service
(general inde..)
24
33
38
41
49
64
83
96
3.00
107
Food
24
31
35
39
50
68
85
97
100
108
Quarters
20
32
37
36
40
55
74
91
100
106
Culture and
entertainment
34
41
43
44
45
64
80
91
100
106
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proposals for devuluntior... Theoretically a decrease in relative prices results
In an absolute increase in tourist receipts. Because of stiff competition
from abroad and the supply constraints, Industry officials believe that the
main effect of devaluation has been Just to retain their share of the tourist
market.
50. Although these devaluations have not been undertaken ptimatily
for the sake of the tourist industry, the net effect has been to neutralize
the impact of inflation on tourist spepJing. In 1965 the devaluation
increased the purchasing power of foreign currency 66.7% while prices rose
only 35%-40%. The 1971 devaluation of 20% washed out much of a recent
10"0-30% rise in hotel rates, helping to maintain the Industry's competitive
positia. in the current tourist season. Taking account of devaluation and
inflation, the accompanying tabulation shows the average daily expenditure
of tourists in 1968 prices.
Year
US $
Year
us $
1961
8.04
1966
9.58
1962
9.59
1967
9.70
1963
10.14
1968
10.91
1964
8.38
1969
10.06
1965
11.27
1970
8.85
51. Competitive prices, however, have not enticed tourists to spend
as much as they do in other countries. An early move to change tourist
spending patterns occurred in 1963 when 2010 discounts were authorized
on all Yugosiav industrial products except tobacco, food products, and
gasoline. The discount only applied io purchases made in hard currency
at shops designated by the National Bank to perform this service. After
the 2010 discount rate was in effect, sales increased from a turnover of
approximately $600,000 in 1963 to $1,800,000 in 1964. Yet, spending
on goods and services excluding hotels and food still accounted only for
8% of the foreign exchange earnings in 1964 compared with 2510 in the
more developed tourist countries. As the economy worsened In 1965, the
20% discount was unofficially extended to include all shops and even
peddlers. These steps tended to insulate the tourist from Yugoslavia's
persistent inflation, but the main problem is that the tourist cannot find
imich that he wants to buy.
2. It has been argued that the demand for toarism Is elastic, unlike outer
invisibIcs, b??:cause of the operation of a large substitution effect. Hence,
a relative price dec'ea ii in Yugoslavia would In the absence of other factors
yield an Increase In total receipts.
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Political Parameters
52. Yugoslav tourism always stands to be affected by external
uncertainties - the most important being the weather and the world
political climate. The effect of bad weather is obvious on a seasonally
dependent industry. But the Yugoslavs have been lucky in this respect; their
worst weather typically occurs in early spring and late fall -- hitting the
crops bu?, missing most of the tourists. Political uncertainty, however, has
had much more of an impact.
53. In 1965, deteriorating West German-Yugoslav relations gave rise
to a fear of manufactured incidents and the West German (and Austrian)
tourist flow -- the backbone of Yugoslavia's tourist market - decreased.
In the summer of 1967, the Middle East crisis - and Yugoslavia's pro-Arab
stance - caused a rash of cancellations by prospective visitors. The increase
in tourists from most Western countries dropped off sharply in 1967 --
rooms could actually be obtained at prominent Adriatic hotels without a
reservation. The slowdown was reinforced by a decline of 70% in
southbound transit traffic. The Czech crisis followed in the summer of 1968.
Yugoslavia's anti-Soviet stance provoked some tour cancellations - notably
from Bulgaria and the USSR - and the crisis probably deterred some late
summer trips by Westerners as well. Except for Czech travel restrictions,
however, the effects on earnings were not lasting.
54. Having little control over external politics, the Yugoslav
government has tried to remove other political barriers to tourism. Laws
have been passed allowing foreign nationals to own houses and apartments,
and granting amnesty to emigrants to enable them to return on visits. The
number of frontier crossings and the number of ports have been steadily
increased. Passport formalities were liberalized in 1961 by bilateral
arrangements with many countries to abolish visas. In 1963, customs
declaration forms were abolished. In 1967, designated by the United Nations
as the International Tourist Year, Yugoslavia unilaterally suspended entry
visas for tourists of all countries. In 1969, visas were reinstated for nationals
of the few countries (the United States included) which had not
reciprocated. In addition to these measures, the government has strictly
instructed its security police not to interfere with the movement of tourists
unless absolutely necessary.
The Future of Yugoslav Tourism
55. The preliminary 1971-75 plan for tourism is more ambitious than
its predecessor. In the spring of 1970 the planners believed it was possible
to achieve tourist earnings of $900 million in 1975, supported by a planned
investment of $624 million. This represented increases of 125% in planned
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earnings and 70% in investment over the 1966-70 plan. But compared with
actual results in 1970, earnings would have to increase by an awesome 260%
in just five years, backed by only a one-third increase in investment over
that in 1966-70. After the mediocre results in 1970, the Yugoslavs
apparently lowered their goal - a figure of $750 million in 1975 was
supplied to the Organization for Economic Cooperation and Development
(OECD) for their November 1970 survey of the Yugoslav economy. Also,
a higher investment figure of $696 million has been mentioned.
56. These figures still are highly optimistic. Unless there were dramatic
increases in tourist spending, length of stay, or off-season visitors, the
Yugoslavs would have to increase accommodations at an unprecedented
pace. Even assuming (unrealistically) that spending per tourist doubled in
the next five years to $100 per visitor (almost twice the increase during
1966-70), the planners would be talking about 7.5 million tourists in 1975 -
an increase of 2.5 million compared with 1.6 million during the 1966-70
period. And even if the tourist-to-bed ratio rose by twice the increase during
this period (to 12 to I in 1975, compared with 10 to I in 1969 and 9
to I in 1966), the tourist industry would have to provide over 200,000
new beds, or 40,000 a year compared with an average of about 30,000
during 1966-70. Moreover, if 60% of these were non-private as currently,
it would take nearly $600 million at 1970 costs to provide these
accommodations, let alone restaurants and other facilities.
57. As it is, Yugoslavia is still plagued with investment problems. Price
instability and lack of investment credit have continued into 1971. From
15,000 to 20,000 new beds were planned for completion in time for the
1971 tourist season, but higher costs and credit problems continue to slow
construction. Although the situation is viewed with alarm, Yugoslav banks -
the major source of funds - can see little way of helping. In a figurative
washing of hands, repre:,entatives of 12 banks met at Split in February
to discuss the problem and decided that "because of outstanding and
unsolved questions concerning the destiny of the present encouraging
measures for financing investments in tourism, banks will no longer be able
to participate in financing the building of hotels and other projects intended
for foreign tourists."
58. Other sources of investment are not doing much better. Workers'
remittances, slated for 25% of the total, would have to rise substantially;
instead they probably will begin to level off during the next five years.
Foreign credits, counted on for 17%, still are available in most cases only
on premium terms. Thus, even if tourist organizations come up with their
share, construction schedules will not be met. At best, 30,000-40,000 new
hotel beds are likely to be completed by 1975, putting a continuing burden
on private accommodations.
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59. Although gross receipts by 1975 may be more on the order of
$500 million than $750 million - tourism will continue to play a crucial
role. It will have to. The outflow of tourists should continue at least at
the same rate during 1971-75, so net receipts might reach perhaps $350
million in 1975. Since trade deficits are as likely to fluctuate as wildly
in the future as they have in the past, it is difficult to estimate the degree
of coverage that tourism could provide. If imports and exports continue
to increase at the average rate of the past 10 years, only about 15% of
the deficit would be covered by n;t tourism in 1975. ii either foreign or
domestic events should prevent even a moderate growth in tourism,
Yugoslavia could easily fall into a serious refinancing trap in the next few
years.
60. The longer run outlook is better. In 1974, a 5,000-bed complex
is to begin operating at Babin Kuk, near Dubrovnik, on the Adriatic coast.
Babin Kuk ("grandmother's haunches") will cost $50 million. The World
Bank is supplying a $20 million loan and Yugoslav banking and trading
organizations are to provide the other $30 million. Estimated earnings for
the first year of operation are $20 million based on full occupancy during
60% of the year.
61. Over the next 20 years, tourism will benefit greatly from the
Northern and Southern Adriatic projects. Sponsored by the United Nations
and partly financed by the World Bank, the $1 billion program will not
only provide tourist facilities on the coast, but winter sports areas as well.
It will also be a stimulus to at least one less developed area - Montenegro.
When the first operations begin in the late 1970s, tourism will be well
on its way to becoming the leading industry in Montenegro's backward
economy.
62. To get the most out of these projects, and tourism in general,
the Yugoslavs will have to make greater efforts in areas other than physical
accommodations. Improved service and higher quality domestic goods at
bargain prices, for example, will help prolong the stay and increase the
daily expenditure of foreign visitors. New tourists will keep coming; it is
up to the Yugoslavs to keep them coming back.
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