What were the problems in Yugoslavian socialism?

by on November 1, 2017 at 1:31 am in Economics, History | Permalink

Here is a recent paper (PDF) by Leonard Kukić of LSE:

Beyond the recent past, and beyond the Soviet Union, we know little about the performance of Eastern European economies. This paper fills the knowledge void by analysing socialist Yugoslavia using a diagnostic tool that identifies the mechanisms that drive economic growth – business cycle accounting. The analysis provides novel findings. During the “Golden Age” of economic growth, total factor productivity became gradually more important in sustaining economic growth. Distorted labour incentives were a major constraint on growth since the mid-1960s, and explain the slowdown of the economy during the 1980s. Socialist growth was primarily handicapped by poor incentives to work, rather than by poor incentives to innovate or to imitate. In an attempt to liberalise the economy, economic power was delegated to the labour-managed firms. These firms were maximising income per worker, which hindered the ability of Yugoslavs to supply labour.

That is via the essential follow Pseudoerasmus.

1 Christian Hansen November 1, 2017 at 1:36 am

I’m guessing socialism was a big one.

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2 Sam the Sham November 1, 2017 at 7:41 am

Ask a silly question, get a silly answer. Well done!

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3 dearieme November 1, 2017 at 9:05 am

The other big one was Yugoslavs.

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4 The Anti-Gnostic November 1, 2017 at 9:19 am

It’s as if these efforts to erect propositional countries on pure economic dogma don’t work!

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5 Art Deco November 1, 2017 at 9:48 am

Yugoslavia wasn’t erected on ‘economic dogma’. The working politicians in Serbia and various Hapsburg provinces put it together rapidly and voluntarily in the late fall of 1918. Never cohered very well, though. The political parties were demarcated on ethnic and confessional lines, like in Ulster, but less intense and thorough.

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6 Rabscuttle November 1, 2017 at 10:16 am

From the paper

Yugoslavia was the fastest growing socialist economy in the post-WWII era (Sapir, 1980). In fact, it was one
of the fastest growing countries in Europe during the 1950s and the 1960s

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7 magilson November 1, 2017 at 11:36 am

I don’t know of anyone who opposes Socialism that would also argue it can’t pull those under the system out of abject poverty. However, as has been demonstrated repeatedly, it has it’s limits once an economy reaches modern complexity.

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8 GoneWithTheWind November 1, 2017 at 7:17 pm

Plus 1

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9 Nick November 1, 2017 at 2:53 am

So, what lessons can we take from Socialist economics? Are there any positives here?

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10 Thor November 1, 2017 at 1:28 pm

Oh I’m against it on moral, political and practical grounds.

But if you must try it, do so in, say, homogeneous Scandinavia rather than in ethnically diverse pseudo entities like “Yugoslavia” where nationalism (rightly or wrongly) rules.

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11 Scandinavian November 3, 2017 at 2:25 pm

Um, no thanks.

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12 So Much For Subtlety November 1, 2017 at 3:42 am

These firms were maximising income per worker, which hindered the ability of Yugoslavs to supply labour.

So we all benefit from bosses being bast@rds by reducing the work force a la Chainsaw Jack?

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13 Art Deco November 1, 2017 at 9:51 am

I think you mean Chainsaw Al Dunlap. His defense was that you cut headcount or everyone loses their job. Turned out some of his performance metrics were driven by accounting fraud.

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14 derek November 1, 2017 at 5:33 am

But look at the bright side. This compassionate system trained them to be virtuous people interested in the welfare of others.

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15 Anonymous November 1, 2017 at 9:04 am

I have personal experience with Yugoslavia and communism. We visited in 1969, in a Volkswagen camper. We were founders of the #vanlife. I remember a dreary place. It was full of unemployed Danes who could live a high life on Danish unemployment. But on the other hand, crumbling concrete, and restaurant workers who said “go away we don’t want to cook today.”

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16 Anonymous November 1, 2017 at 9:11 am

“High life” was ironic. To be clear, “beach bums.”

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17 The Centrist November 1, 2017 at 1:41 pm

I went in 89 and again in 90. Dreary socialism and poverty (I saw a burly man yoked to a small plough guided by his equally burly wife) but the abiding memory was the hatred of the Croats for the Serbs and vice versa.

The academics were mostly Marxists and the politicians were nationalists (the clueless former did not see the slobbering latter coming; both were self serving) and no one believed in the economy. Indeed one’s best hopes for one’s children was, as in Greece today, a government position.

Slovenia was lovely though.

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18 Anonymous November 1, 2017 at 3:47 pm

It was poor. Mexico poor. But in 1969 Italy didn’t seem so much richer. There is the growth story.

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19 Brett November 1, 2017 at 9:45 am

Pseudoerasmus is an excellent follow. If I could only follow 10-15 people, he would be one of them.

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20 Slugger November 1, 2017 at 9:53 am

I’d guess that a big focus of the central government in Belgrade was staying outside the Soviet Union’s orbit while simultaneously avoiding internal disruption from ethnic conflicts between Serbs, Croatians, and Bosniaks. Tito was able to finesse these severe problems. I know that this is an economics blog, but economic theories have to take a backseat to the realities of genuine critical forces acting on the state. We should not compare the actions of Yugoslavia to some hypothetical ideal economic system. Further economic uplift in that part of the world required the collapse of the USSR and an often bloody establishment of the current borders.

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21 The Centrist November 1, 2017 at 1:46 pm

As I recall, Tito finessed this (moderate, stability) via several means. Fatigue and poverty from the war bought him some time, waiting to see what would happen next on the world stage bought him some time, and his stranglehold over the army and police bought him some time too. When he died it unravelled.

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22 Slugger November 1, 2017 at 1:59 pm

I certainly can not disagree with anything you said. My point was that the former Yugoslavia was faced with two very serious problems-internal divisions from ethnic rivalries and external pressure from the USSR- that precluded development of an ideal economy. My larger point is that peace and stability are prerequisites of economic growth. You can’t have a free market transaction if somebody can show up with a gun in hand.

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23 Chris November 1, 2017 at 4:21 pm

Other countries faced internal divisions and external pressure from the USSR. Italy for one. Granted the divide between the north and the Mezzogiorno wasn’t as big as between Macedonia and Slovenia, but not more than Croatia and Serbia. And all of Western Europe was under Soviet pressure. Stalin hated Tito, but in response the US backed Tito – they received Marshall Plan Aid and even received military aid. There were even hints Yugoslavia might join NATO, but that really depended on how predatory the Soviets were. After Stalin’s death Yugoslavia distanced itself from NATO and remained non-aligned, and Tito backed away from further reforms.

So Yugoslavia certainly had just as much peace as any other country in Europe did. Certainly more peace than France did between 1945-1962 who fought wars in Indochina and Algeria. And while there were ethnic divisions, they were manageable until the 1980s. In terms of peace and internal stability, Yugoslavia wasn’t really any worse off than the rest of Europe between 1950-1980.

Yugoslavia had a different form of socialism than the Soviet bloc which explains why it did better than them, but because it was a form of socialism it did worse than the market economies.

The real problem for Yugoslavia is that the southern part was backwards and undeveloped relative to the northern areas. In order to develop that, wealth had to be transferred from Slovenia and Croatia to Macedonia, but the Slovenes and Croatians didn’t have any affinity with the Macedonians and therefore resented that. This would have been hard to overcome in any scenario, but the weaknesses of the socialist economy were an additional obstacle.

Yugoslavia fell apart because the economic reforms insisted by the West in 1989-1991 caused too much harm for the fragile cohesion of Yugoslav identity. “Yugoslavians” could only take so much pain before members starting saying, “Why should I as a Slovenian suffer so much in order to help a Macedonian”. In contrast, Poland accepted far worse shock therapy because everyone was Polish and nobody had a sub-identity to distinguish this Pole from that Pole. If statesmen had understood the fragility of Yugoslav identity better, they would have accepted less far reaching economic reforms that would have delayed recovery, but which imposed less pain on the population. Of course there was more than that. Milosevic stole almost two billion dollars in December 1990 from the federal bank which would have cushioned a lot of the blow.

A stronger rule of law and earlier market reforms likely would have kept Yugoslavia intact. If Stalin had lived longer so that Tito’s arrangements with the West kept getting strengthened, that just might would have happened and the sorry history of the Yugoslav Wars never happened.

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24 Barkley Rosser November 1, 2017 at 4:25 pm

There are several oddities here. The first is that when I looked at the paper (which I did), the figures did not show a labor wedge that I could discern but a capital one. As it is, I am not at all a fan of the business cycle accounting method of determining what is causing what in growth. So, quite aside from the apparent oddities of the figures, which I may simply be misreading, I do not put much credibility on this claim about disincentives for labor, although what is true is that labor-managed firms do not have an incentive to hire new workers, and the unemployment rate did rise, noticeably after 1975.

Some other things going on and either not mentioned or only briefly so in other comments (or in the paper). Prior to WW II, Yugoslavia was a monarchy heavily dominated by Serbia, who basically got it as prize for being on the winning side in WW I, with that war starting, after all, as a result of a Serbian nationalist assassinating the heir to the Habsburg throne in Sarajevo in heavily contested Bosnia-Herzegovina. Tito was a Croat who engineered a much more balanced system between the various republics and sub-republics and maintained that balance pretty well while he was still alive.

Yugoslavia was indeed a different sort of socialism. There was “collective ownership” of firms, but it really amounted to nobody owning the firms in practice in contrast with what one saw in Soviet block CMEA nations, where the state was the clear owner. Also agriculture remained overwhelmingly privately owned and run. There was minimal central planning, and while workers’ management was more a slogan than a reality (hired managers approved by the ruling party ran the firms pretty much), it was largely a market economy. However, it was subject to soft budget constraints as analyzed by Kornai for market socialism, which Yugoslavia certainly was, if an odd form of it.

The soft budget constraint was part of the way that Tito managed keeping the regions happy. The lending to firms was basically done by republic-level banks that were backed up by the central bank. This was a major factor in the expansion of inflation, which very much took off in the 1980s after Tito died and the system really began to fall apart. I did not see any discussion of this in the paper, and the accelerating inflation is another reason to take empirical estimates of much of anything going on in the 1980s with giant mountains of salt.

Finally, a major source of failure was that in spite of Tito’s efforts to balance the regions off, in fact regional inequalities expanded massively during the period of postwar Yugoslavia, another point not mentioned in the paper, but certainly relevant to the breakup of the nation and its unique system. So in 1954 the ratio of per capita income in Slovenia (richest) to Kosovo (poorest, but a sub-republic of Serbia) was 3 to 1, but by 1989 it was 9 to 1. And, yes, Slovenia was the highest per capita income former Communist state in Europe at the collapse of Soviet bloc communism (with Yugoslavia not a part of the bloc), and in the first group of those to join the EU and the first to adopt the euro, for better or worse.

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25 Barkley Rosser November 1, 2017 at 4:31 pm

1945 was when the ratio of per capita income in Slovenia to Kosovo was 3 to 1.

BTW, Yugoslavia’s independence from Soviet domination was due largely to the fact that it was Tito’s guerrillas who liberated Yugoslavia from Nazi and Fascist rule rather than the Soviet red army as in most of the rest of Central and Eastern Europe that became Communist Party-ruled. Initially in the late 40s, Tito followed a super-Stalinist model, but then moved to the labor-managed market socialist model after his split with Stalin in 1948, in part looking for an ideological alternative to justify his deviation from the Soviet model. Milovan Djilas was the best chronicler of all this in his various books, and his status was generally a good sign of how liberal or not Tito was being in internal political policy, as Djilas went in and out of jail and favor on a regular basis.

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26 Ervin Dervisevic November 6, 2017 at 4:55 pm

Very good, thanks.

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27 Matt November 2, 2017 at 12:25 am

No mention of Alec Nove in the paper, despite the fact that he devoted a fair amount of his excellent book, _The Economics of Feasible Socialism_ to evaluating the Yugoslov system and comparing it to the Soviet one. That, and Rosser’s good comment above makes me doubt that this paper is going to be that useful.

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28 jorod November 3, 2017 at 6:21 pm

Socialism doesn’t work What else is new?

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