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Socialist Yugoslavia - 1991 - The Economy

Between 1975 and 1980, the Yugoslav social product fell and inflation reached an annual rate of 50 percent. When the international oil shock of 1979 hit, policy makers realized they could not continue an economic development strategy based on heavy foreign borrowing and inefficient investment at home. In 1982 the Long-Term Economic Stabilization Program was released by the Krajgher Commission for Economic Stabilization. The commission reexamined Yugoslavia's development priorities and formulated a revised strategy for the 1980s. Self-management would remain at the center of the system, but substantial reorientation would occur. Important elements were coordination of investment between industrial and agricultural sectors, diversification of energy resources, greater investment in technical development, and improved incentives for the private sector, now recognized as the most efficient part of the national economy. Workers, whose wages had increased faster than their productivity under the self-management system, would be subject to wage austerity programs to restore the balance.

Although the party overwhelmingly endorsed the long-term program, influential conservatives blocked practical application of Krajgher Commission programs. In 1983 the Federal Assembly (Skupstina) passed only eight of twenty-five major legislative proposals; it postponed decision on the remainder, many of which would have activated parts of the long-term program. The events of 1983 set a precedent for a new round of economic bickering and regional finger pointing that delayed meaningful reform another seven years.

Economic reform remained a critical national and regional need in 1991. When economist Ante Markovic became prime minister at the end of 1989, he inherited an inflation rate that had reached 2,600 percent that year and a national average personal income that had sunk to 1960s levels. Markovic's two-step program began with harsh measures, such as closing unproductive plants, freezing wages, and instituting a tight monetary policy to clear away the remainder of the moribund state-subsidized system as soon as possible. Markovic also avidly sought new economic ties with Western Europe to reinvigorate Yugoslavia's traditional policy of multilateral trade.

Once inflation had been curbed, phase two (July 1990) continued tight monetary control but sought to spur lagging productivity by encouraging private and foreign investment and unfreezing wages. Markovic applied his plan doggedly, convincing the Federal Assembly (Skupstina) to pass most of its provisions. He was aided by the lack of workable alternatives among his critics, by the international credibility of his consultation with economists of the International Monetary Fund ( IMF), and by his personal popularity. Inflation ended when the dinar was pegged to the deutsche mark in December 1989, and new foreign loans and joint ventures in 1990 improved capital investment.

Although the end of inflation was very popular, however, plant closure and wage freezes were decidedly not so in regions where as many as 80 percent of plants were kept running only because of state subsidies. The Serbs opposed the plan from the beginning because their communist-dominated industrial management system was still in place, meaning that a new market economy would threaten many privileged positions. The Slovenes resented federalization of their funds to help run the program. In all republics, the immediate threat of mass unemployment blunted the drive to privatize and to peg wages to productivity. As in previous years, the republics saw a threat to their autonomy if they acceded to the requirements of such a sweeping federal program. By the fall of 1990, the optimism of Markovic's first stage was replaced by the realization that many enterprises throughout the country either could not or would not discontinue their inefficient operations and would remain socially owned. Several major industries in Slovenia and Croatia were also still state controlled in 1991, although both republics drafted privatization laws that year.

The Serbian economy continued to decline at an especially rapid rate after the Markovic reforms. In December 1990, the Serbian government illegally transferred US$1.3 billion from the National Bank of Yugoslavia to bolster the sagging republic economy--defying federal economic authority, further alienating the other republics, and exposing the failure of reform in the Yugoslav banking system.

The proportion of unprofitable enterprises in the national economy (about one-third) did not change between 1989 and 1990. By 1991 bankruptcy declarations by such firms had virtually ceased. Strikes decreased only slightly from a 1989 high of 1,900. A wave of strikes, mostly by blue-collar workers, slowed the economy in all regions of Yugoslavia at the end of 1990. At that point, inflation had risen to 118 percent per year and was expected to continue to rise into 1991 spurred by the Serbian bank transaction and unauthorized printing of money by republics in the last half of 1990. In mid-1991 inflation rose further when the federal government began printing more money to cover escalating military costs. By that time, the government had lost control of federal tax revenues, which were collected by the republics. Unemployment was close to 25 percent in January 1991, and no improvement in the standard of living was foreseen in the near future. Industrial production that month was down 18.2 percent from January 1990, the greatest such drop in forty years. The failure to devise a new banking system after the previous system collapsed increased black market financial activity and discouraged guest workers abroad from making deposits.

Markovic warned consistently that continued chaos jeopardized economic reform and ultimately the federation itself. The IMF, for example, had joined the EEC in offering a combined loan of US$2 billion in early 1991, but continued unrest threatened that vital arrangement. Already in January 1991, the EEC postponed consideration of membership for Yugoslavia because of the internal situation. In early 1991, the United States cited human rights violations in Kosovo in threatening to end all bilateral economic aid. In the fall of 1991, the United States, the Soviet Union, and the EEC all threatened economic sanctions if diplomacy did not replace armed conflict in the Croatian crisis. The United States adopted sanctions against all the republics, but the EEC excluded Slovenia and Croatia.

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Page last modified: 21-09-2013 15:09:05 ZULU