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December 1962

Yugoslavia at the Crossroads

Fred Warner Neal has observed the development of Yugoslavia under Tito on long and repeated visits since the end of World War II. He was formerly a foreign correspondent for the Wall Street Journal, then Chief of Foreign Research on Eastern Europe for the Department of State. Now teaching at the Claremont Graduate School in California, he is the author of Titoism in Action and co-author with George W. Hoffman of Yugoslavia and the New Communism.

by Fred Warner Neal

Titoism is today at something of a crossroads. If Yugoslavia's undoubted economic successes during the past twelve years can be attributed to its singular half-collectivized, half-free economy, so can the economic crisis the country now faces. This crisis raises the question of how viable economically is the Titoist system, with its management of factories by the workers. How the crisis is met may well affect the future course of Yugoslavia's liberalized type of Communism.

The present difficulties, however, should not obscure the spectacular economic results thus far obtained or the contribution of Yugoslavia's pioneering efforts to achieve a freer kind of socialism than exists anywhere else. In fact, the present troubles--a falling off of production, inflation, bogging down of distribution, and foreign trade disappointments--are in themselves indicative of how far Titoism has come.

When the Communists took over Yugoslavia in 1945, they set about to industrialize the backward, agricultural, and war-devastated country in their usual harsh and doctrinaire way: nationalization, collectivization, a Five-Year Plan, and a big stick in the hands of the secret police. By 1949, the country had reached a sorry condition from every point of view. Expelled from the Soviet bloc for nationalist deviation, and without ties in the West, Yugoslavia was completely isolated. A Soviet economic blockade compounded the chaos produced by Tito's efforts to pull the country up by its bootstraps. Crude attempts at collectivization had backfired to a point where virtually no grain was available. Production was at a standstill. The population was in many ways worse off than it ever had been.

By 1961, the change was so complete that it was hard to recall the condition Yugoslavia had been in twelve years before. The first and most important stages of industrialization had been completed. Production showed the sharpest increases of any country in the world. With collectivization abandoned, a revitalized agriculture was providing not only adequate food but surpluses. A steady stream of consumer goods was available for the first time, and people had money to buy them. Poverty had by no means been eliminated, but the extreme privation that had earlier characterized large sections of the country had disappeared. Foreign trade, primarily with the West but also with the East and other parts of the world, was expanding. Politically, Yugoslavia was not a democracy as Americans knew the term, but it was no longer a police state either. A new Communist system, permitting significant areas of free expression and widespread popular participation in public affairs, made even anti-Communist Yugoslavs glad that they lived under Titoism rather than under any other regime in eastern Europe.

To understand how this came about and to see why Yugoslavia's comparative economic well-being proved to be so tenuous, it is necessary to understand what happened to the Yugoslav Communists when they were so unceremoniously kicked out of the Cominform in 1948. The Yugoslav Communists, despite their nationalist turn of mind, considered themselves the most faithful of the faithful. Stalin's denunciation of them as heretics produced in them a psychological shock so strong that afterward they became changed men. They were still Communists, but they now saw the Soviet Union, Communism, capitalism, and, indeed, the whole world in a different, although still Marxist, light. A new ideological base, needed to explain and justify their position, was worked out. And from this resulted the new political and economic system that came to be known as Titoism.

The theoretical pivot of Titoism is that under socialism the state must begin actively to "wither away," rather than, as in the U.S.S.R., to get bigger and stronger. Accordingly, the highly centralized government and economic system, closely modeled on the Moscow pattern, gave way to sweeping decentralization and liberalization. The Soviet fiction that government ownership of means of production gives workers control was recognized as a fiction. In a dramatic move, the Yugoslav government divested itself of ownership of factories and turned them over to the workers to manage directly. At the same time, centralized planning by decree was abandoned, and with it the bevy of economic and other ministries which had controlled everything from Belgrade.

The resulting system sought to blend principles of free enterprise with those of collective ownership. It might be described as an indirectly controlled market economy, with elements of Keynesianism as well as of Marxism.

Under this system, each factory is an autonomous and competitive unit. It is not government owned, nor, of course, is it private. The key organ is the workers' council, elected by the employees of each enterprise. This council, with its executive committee, the management board, elected from among its own membership, is responsible for operations. It decides what to produce and how much, what prices to charge, what wages to pay, and what to do with any profits left over after meeting costs and taxes. Together with representatives of local governments, it chooses the plant director, and it can fire him if his work is unsatisfactory. The main charge to workers' management is to operate profitably.

There is economic planning in Yugoslavia, and a lot of it, but it is quite unlike its counterpart in the Soviet Union and other Communist countries. The central plan does not order each unit in the country to produce so much of this and so much of that. Rather, it is a compendium of the economic plans of republics, local governments, and individual factories; and none of these production plans are legally binding. In order to achieve results approximating the planned figures, the government seeks to influence the market by a series of indirect controls.

There are two types of such controls. One consists of a series of annual enactments providing for some direct federal government investment, taxes, and interest rates, together with broad regulations dealing with prices, wages, and foreign trade. The other involves technically nongovernmental chambers and associations, to which all factories belong, depending on their products and location, and the influence in both factory and government of the Communist Party and the Party-controlled Sindikat, or trade union.

But under the Yugoslav system, the workers have a direct hand also in formulating governmental economic policies. At each government level--federal, republican, and local-- there is a two-chamber legislative body, one part of which is a Council of Producers. These councils are elected by the workers and by peasants belonging to collectives. A part of the system, also, is the commune, which is the basic unit of local government. The commune is more or less autonomous, with responsibility for general overseeing of economic enterprises and for most economic investment within its jurisdiction.

This, in brief, is the essence of the Titoist economic system. How has it operated in practice?

The positive side is fairly obvious. The Titoist economic system represents an undoubted contribution to industrial democracy. Under it, worker morale is generally high. And, as the Yugoslavs rightly point out, it has produced significant economic results. Yet it is not easy to evaluate this unique system. Considering the fact that much real authority was placed in the hands of workers and that they were inexperienced and backward in the extreme, it is not surprising that worker management also produced waste, confusion, and at times, near chaos. Vice President Edvard Kardelj once referred to this as "the price we have to pay for beginners' school."

Not all the beginners' price was borne by the Yugoslavs, however. In the period from 1950 to 1959, they received more than $1,150,000,000 In U.S. economic assistance. In addition, $724 million in U.S. military aid relieved the economy of a strain to which it might otherwise have been subjected. This outside aid helped in two major ways. First, the Yugoslavs were able for several years virtually to neglect their agriculture and concentrate on industrialization, confident that basic food needs would be met. Second, it permitted a much higher "beginners' price" than a small and poor country like Yugoslavia could have afforded without it. This margin of fat also encouraged more political liberalization than might otherwise have been the case.

Furthermore, in practice the Yugoslav system has operated unevenly. Every time that workers' council autonomy and reliance on the market approached in fact what they were supposed to be in theory, economic difficulties appeared and the regime was forced to haul back. On the one hand, the country has been too poor to permit complete experimentation with free competition, and on the other, it has been inhibited by its own ideological concepts from going all the way back to centralization and government control. The pendulum swinging back and forth has also illustrated the traditional Yugoslav difficulty in exercising restraint.

If the earlier system was too centralized, what replaced it after 1949 was too decentralized, or at least was decentralized too fast. Although many remained skeptical of the extent to which workers managed their factories in Yugoslavia, what happened indicated that they really did manage them to a considerable degree. With the incentives available to workers under the new system, production did begin to move upward, and some of the more extreme cost-price ambiguities of doctrinaire Communist economics were eliminated. But this was accompanied by a serious price inflation and investment disorientation from which, in one sense, the country has suffered ever since. Workers in control of the factories did just what might be expected. Almost at once, they raised wages with little regard to production. Then they had to raise prices to cover the wage increases. There was a rash of uneconomic investment, not only by the autonomous factories themselves but also by the now freer republics and localities. This, plus foreign trade manipulations which ignored the overall need of the economy, had a deleterious impact on basic sectors of industry. By 1954, Svetozar Vukmanovic-Tempo, the top overseer of economic affairs, declared that "the whole system has entered a blind alley."

There had developed in Yugoslavia a curious and almost doctrinaire attachment to Titoist laissez-faire economics. The regime opposed "intervention in the market" and at first relied on the law of supply and demand. But in underdeveloped Yugoslavia, supply was extremely short, while demand was unlimited. The small number of producers gave many enterprises monopoly positions, and they often exercised them in traditional monopolist fashion, with resulting inhibitions on production and pressures on the price structure. In addition, managerial inefficiency was widespread in essential industries whose elimination the country could not afford.

Nor was intervention by the Party, the traditional refuge of a Communist regime in trouble, of much help. The Party in Yugoslavia, now renamed the League of Communists, had been officially admonished to stay out of economic affairs and not to try to impose its will on workers' councils and plant managers. Moreover, in part as a result of departures from previous Communist practice and in part as a result of the ideological attacks of Milovan Djilas, the Party was in a state of disarray and confusion. Its writ was wide, but the bosses found it increasingly difficult to implement.

Faced with this situation, the regime, although still not abandoning the fundamentals of the system, enacted a series of tough wage and price controls aimed at correlating pay increases with increases in production. The role of the industrial chambers and associations was strengthened, and a drastic tightening of Party discipline was ordered. Between 1956 and 1958, this inevitably had political overtones. The emphasis was away from liberalization and democracy, and there was a noticeable narrowing of the limits of freedom. That this was a period in which Tito was attempting rapprochement with the Soviet Union did not help. Workers' councils did not formally lose any of their independence, but they became less organs of the rank and file and more a sort of management bureaucracy. Under one guise or another, a certain amount of recentralization took place.

All this stopped the deterioration of the economy, and the real spurt in Yugoslav industrial output dates from 1956. But again the pendulum swung too far and before long began to produce its own reaction. Party bureaucrats in this period regained many of the privileges and perquisites of which they had been deprived earlier. Management--both directors and workers' organs--in many cases utilized profits for personal ends instead of sharing them with employees.

Previously, wages had gone up too fast, but now they were not going up fast enough, considering expanding output and high prices. Real wages increased slightly in some sectors, but by no means across the board, or enough. The average basic wage for the highest skilled category of workers was 400 percent above that for unskilled. And while the economy went forward in basic items, consumer goods production fell. There was no question that a large percentage of Yugoslavs were better off than at any time since the war, but most of them were not as well off as they thought they should be, and a very large number had to work at two or more jobs in order to make ends meet. In some industries, there were as a matter of policy neither wage increases nor profits distribution of any kind, regardless of income.

All this produced grumbling, not only among ordinary people but in the Party. Worker morale suffered noticeably, and before long it began to interfere with efficiency and production. Public opinion, however limited, is a factor in Yugoslavia, but what really pried the lid off was a series of strikes, something unheard of in a Communist country. The Yugoslav leadership was shocked and frightened. Although there was the usual dire talk about anti-regime elements, in all cases the strikers got raises. Finally, Tito's Executive Committee, top body of the League of Communists, in the spring of 1958 published a circular letter denouncing the abuses and calling for a new deal.

Changes were not long in coming, and once more they came too fast and went too far. In addition to correcting some of the abuses mentioned above, new investment was slated for consumer goods industries, restrictions on wages and prices were eased or eliminated, and again the forces of the market had freer play.

What the regime did not reckon with was a force everybody knew about, the psychology of rising expectations. Consumer goods output, which had increased slowly since 1954, now shot up sharply. In Yugoslavia's limited circumstances, this meant a slackening off of the production of industrial goods. This would have made sense, given the fact that the basic underpinnings of industrialization had been achieved, had it been kept within bounds. But it was not. The rise in consumer goods production went hand in hand with an increase in wages. In 1960, a sweeping reform removed most of the existing restrictions on wages. An effort made to relate increases to rises in production was unsuccessful.

The main economic purpose of these relaxations was to encourage production by adding to workers' incentives. For a while it looked as if the reform might succeed. The year 1960 saw Yugoslavia riding on a wave of unprecedented prosperity. Industrial output was still on the rise. The increased investment in agriculture, begun four years earlier, had paid off by 1919. Aided by good weather, two bumper crops resulted. In 1960, also, a new foreign-trade plan was worked out to permit freer imports. From home and abroad, consumer goods of all sorts now cascaded onto the market. As wages went up, demand increased still further. Prices, raised to meet the wage increases, as always rose faster. Consumer credit, a device the Yugoslavs had copied from the West, expanded threefold, despite constantly increasing charges. Personal savings stored up from the days of consumer goods shortages contributed to the frenzied buying wave. Indicative of what was happening was the importation into Yugoslavia of automobiles at a rate of a thousand vehicles a day. Sales of electric refrigerators, ranges, washing machines, and plumbing fixtures doubled, then tripled and quadrupled. Modern apartments, private homes, and fancy hotels sprang up, along with new office buildings and factories. The great boom was the pride of all Yugoslavs, Communist and anti-Communist alike, and was of interest to the whole world.

There were, however, several fatal flaws in the Yugoslav boom. For one thing, much of it was done on credit, which in decentralized Yugoslavia tends to be free and easy. When the initial wave of buying eased, prices did not come down. Instead, the practice was widespread for enterprises to continue stockpiling goods, financing operations with bank loans.

Second, consumer goods were increased at the expense of basic industrial output. To handle the shift to more consumer goods, the Yugoslav planners had relied on an expansion of foreign trade that never came off, in part because not enough was produced. From the International Monetary Fund, the United States, and other Western countries, Yugoslavia had obtained in 1961 credits of some $275 million to cushion the inflationary impact of reduced import restrictions.

What happened was that exports failed to increase noticeably, while imports passed all bounds and emphasized the wrong things. The foreign credits were, in effect, squandered. By the spring of 1962, serious difficulties were apparent. Industrial production fell, in some areas drastically. Prices, meanwhile, had risen precipitously, and real wages went down sharply Many enterprises were in trouble, some because their domestic sales fell off sharply, others because they could not obtain necessary raw materials, still others because they were dangerously in debt. Workers' councils began laying off employees and unemployment was recognized as a serious problem. Communist Yugoslavia was suffering from that familiar capitalist phenomenon, the economic crisis. To make matters worse, bad weather conditions resulted in a decline in agricultural output, and food prices began to soar.

Once again, Tito, speaking for the Communist hierarchy, ordered the reins tightened. He lectured acidly about stage and fiscal policies and demanded stringent Party action and discipline. New wage and price controls were hastily worked out, and imports were sharply restricted. The Yugoslavs, still in the process of loosening their belts, were called on once more to tighten them.

What the future would bring was unclear. Basically, the Yugoslav economy was sound enough if it could be made to work properly and could be content to expand at a much slower rate than any attempted since 1958. But the immediate prospects were far from rosy. After the debate in Congress, it was clear that although Yugoslavia might receive enough U.S. agricultural aid to cope with food shortages, the United States was ill disposed to financing Titoism in anything like the way it did in former times.

A new political rapprochement with Moscow seems in the wind, and this is likely to produce some credits from the Soviet bloc. These cannot possibly be enough, however, to permit a resumption of the merry-go-round of the last two or three years. Meanwhile, the balance-of-payments crisis that Yugoslavia has faced almost annually now looms larger than ever.

Expanded foreign trade would help enormously, but the very difficulties that expanded exports might overcome are likely to inhibit the expansion. There are some big questions in Yugoslavia's foreign-trade future. One is agriculture. It is unlikely to be a source of foreign-trade revenue in the foreseeable future, but increased output could free funds for industrial imports.

A second question is whether the Yugoslav economic system can meet world industrial prices. To ensure production of the right items at the right prices may require either more rigorous central controls or more rigorous competition than has thus far characterized the Yugoslav economy.

Finally, there is the question of the markets themselves. The Yugoslavs are making a big play for foreign trade with the underdeveloped countries of Asia and Africa and, more recently, Latin America. Unfortunately, these nations lack precisely many of the things the Yugoslavs need. They are not a substitute for trade with more developed areas, despite the ideological attractions. Here the Yugoslavs run into the international political complications of their position as independent neutralists. The more developed nations are tending to organize into economic blocs that reflect their respective political blocs, both of which the Yugoslavs oppose. Barring a shift in orientation, Yugoslavia is unlikely either to qualify for or to seek membership in the Soviet trading system. The bulk of its trade is now with the West, and in any event this is the more profitable area. But the prospect is that the West will be integrated in and around the Common Market, where Yugoslav membership is equally unlikely. What the Yugoslavs fear, therefore, is that they may be squeezed out by the two competing blocs .

What they would like is an independent arrangement with both Eastern and Western economic blocs, something resembling what is being discussed for the United States with the Common Market. It is not at all impossible that the Soviet bloc will accommodate them in this. If the Common Market, for political or other reasons, cannot make the same accommodation, inevitably the result will be a closer orientation of Yugoslavia with the Soviet bloc, politically as well as economically--although it should be added that there is no prospect of Yugoslavia's affiliation with the Soviet bloc in any formal political sense. For some Yugoslavs, the closer the affiliation with the Soviet bloc, the better. Others, who resolutely oppose any such development, hope that Common Market policies will be wise enough to help them avoid it.

Titoism as an overall system is unlikely to be reversed, and Yugoslavia's course as a strictly independent Communist state appears well assured. Yet, ultimately it is bound to move one way or another, if only toward giving more substance to its own promises.

Today one feels in Yugoslavia great uncertainty and confusion. This produces--and reflects--political as well as economic stagnation. Much of the enthusiasm and dynamism characteristic of earlier years is missing. One factor may be simply that the senior leaders of the country have stayed in power too long. The new constitution soon to be adopted provides for rotation in office, but it exempts Tito. Under such a condition, it may amount to little more than a game of political musical chairs. Perhaps it is true, as many Yugoslav Communists argue, that the country would be hampered rather than helped by political competition of the Western sort. But unless the Party--which is the real, if not the sole, vehicle for political development--shows more initiative and daring than it has for some time, it is hard to see the source of the new ideas that are needed to get Titoism out of its present doldrums.

Copyright © 1962 by Fred Warner Neal. All rights reserved.
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