Planning Through the Market

THE JUGOSLAV EXPERIENCE

THE development of the Jugoslav economic system in the 1950 has puzzled many people in the world. No wonder. The fundamental principles of Marxist socialist economy have been applied in an unconventional manner, for it was decided that a solution had to be found simultaneously both for the problem of accelerating economic growth and for attaining an open economy in which the principle of economic coexistence could be implemented through the international market.

In accomplishing this complex task Jugoslavia often had to tread entirely unexplored ground. She had to rely for guidance partly on general theoretical knowledge, partly on the experiences of other countries, and partly on her own experiences both with the capitalist system between the wars and with the centralized administrative system in the period immediately following the Second World War. Stage by stage, by trial and error, she consolidated her achievements, each time in order to make further progress possible. Some people considered this a pragmatic approach, failing to see the consistency in the country's endeavor to attain its fundamental aims.

II. IDEOLOGICAL AND THEORETICAL BACKGROUND

The capitalist system which had been in force in Jugoslavia in the interwar period had barely achieved a 1 percent rate of increase in the national income, and it had led to complete social stagnation. Similarly, the centralized administrative system in the early postwar period (1948-1952) also failed to secure a higher rate of growth. Although this system made possible the construction of some basic industries which served to promote further progress, the system itself created bureaucratic rigidity and economic inefficiency. Amid a turmoil of international events, the country had to find its answer to certain problems which it faced in common with others in the present epoch.

One basic problem was that of humanism in economic development. It was not just that under the bureaucratic centralized system economic development had become a matter of l'art pour l'art; more specifically, the conflict with the Cominform had led the Jugoslavs to give more emphasis to the humanistic traditions of the Marxist ideology. The discussions on "the withering away of the state" reflected in a general way this basic conflict. The same conflict appeared in the discussions on the role of the "law of value" in a socialist economy.

These ideological and theoretical discussions resulted in a revival of the basic principle of socialist relations, advanced by Marx, of "a full and free development of individuals." It clearly follows from this premise that it is not sufficient for a socialist system to declare that it stands for the working people. It has to bring into being a system of management both of and by the working people. Here lies the root of the whole idea of social self-government which President Tito proclaimed in 1950, and which in 1953 became by law the basis of the whole Jugoslav system.

III. PLAN AND MARKET

Radical changes in the Jugoslav system of planning and business management became inevitable when the individual, as producer, was placed in the center of the entire economic process.

Two other systems had failed to work satisfactorily:

The system of centralized operational planning leaves only a small margin to the initiative of the individual as agent of the economic process. Demand is determined by the central organs and the structure of production is then planned accordingly. True, enterprises are stimulated to over- fulfill the plan, but they are not stimulated to do so by additional demand but by a system of bonuses. Supposing the planned demand had been correct, the stimulation they received would then help to upset the balance between supply and demand. Moreover, in this system the preference given to producer goods is elevated to a basic law of economic development; the priority accorded key industries in the allocation of raw materials has the inevitable result of underrating the consumer's demand and limiting his freedom of choice.

The free-market system is also inadequate for an accelerated economic development, since the low level of demand does not provide enough stimulus for the development of key industries. In an underdeveloped country, accordingly, the profit motive fails to provide the optimal allocation of productive resources, since a low level of demand does not automatically create an adequate industrial capacity.

It was necessary for the development of the socialist system- based on the principle "to everyone according to his work"- to find a solution between these two extremes. The basic task of every economic system is to allocate productive factors in the way best calculated to attain the highest national income. It can be said that in general the central planning system neglects the postulate of economic efficiency, but instead emphasizes growth of the country's economic capacity; and in this it succeeds fairly well. However, the maximum increase in national income is not achieved by mere increases in quantity of production but by the actual satisfaction of demand. This requires that the consumer's preference be given higher priority. Jugoslavia thus was faced with a double task: to give the human element the greatest possible expression and to accelerate economic growth to the maximum possible extent. In what framework could this be done?

Relations between supply and demand, as expressed in the market through the oscillation of prices, perform two economic functions: on the one hand, they indicate the efficiency of production; on the other, they can act as automatic allocators of the resources. The first of these functions should be maintained to the greatest possible extent. So long as we wish to have actual consumption determined by the consumer and not by the plan-i.e. the administration-we should leave it to the consumer, for whom the production is meant, to assess the value and quality of products by freely showing his preferences. This is the basic requirement in the humanization of the economic process.

The market's role in allocating the factors that go into production is a different matter. The interests of the community do not necessarily coincide with an arithmetical sum of the individual interests of its members. Instrumentalities must therefore be created which will bring economic growth to new heights. They should be built into the machinery of the market so as to accelerate growth in ways which best serve the community as a whole.

The Jugoslav policy of economic planning has evolved within this general framework. After abandoning the detailed operational planning of 1947-1952, and all through the succeeding period up to 1957, there were no long-term Jugoslav economic plans. Attempts were made, however, to introduce the new approach gradually through changes in annual plans. In these, direct physical planning was almost entirely absent, but they still did not remove altogether the administration's interference in the economic process, because they set certain standards in various areas of the economy which were of key importance. The Second Five Year Plan (1957-1961), and particularly the Third (1961-1965), ended physical planning completely as well as direct administrative control over the economic process.

Today Jugoslavia has what might be called "planned guidance" of the economy. In form the plan is comparable to an economic budget, based on an analysis of national income, as used by some countries in the West. It relies on an analysis of trends revealed in the preceding period as well as on the targets set by the National Assembly, and from these it forecasts the movements in basic economic indices over the period in view. A principal task is to bring these indices, expressed in value and not in physical terms, into mutual dependence and balance.

Accordingly, the plan provides the framework within which economic activities should develop in the future. It does this in two ways:

First, the plan makes allowance for supply and demand to modify the expected development; at the same time, it guarantees that where needed there will be compensation in other sectors, so that an advance in one sector will not be checked by a slowing-down in another. Thus the actual supply and demand do not impair the plan as they do in the case of central planning, but on the contrary help achieve the planned targets. The corrections introduced by supply and demand into the planned forecasts stem inevitably from the shortcomings of economic analysis and the manifestations of free human action.

Second, the plan provides for a number of fiscal and monetary measures designed to create a favorable climate and built-in economic stimuli for achieving desired trends.

IV. WORKERS' SELF-GOVERNMENT

The basic function of the law of supply and demand could be achieved only if enterprises increased their economic independence. This general process, evolved over the last decade, is most often referred to as decentralization. However, explanations are necessary since the same term is used to describe the changes which have taken place in the Soviet system of planning.

In the Soviet system, decentralization refers to the transfer of specified administrative and operational functions to lower bodies of government-the Sovnarhoz. This does not give greater economic independence to Soviet enterprises. Although some reforms in the last few years have increased the funds at their disposal, their spending of those funds still remains under strict control.

In Jugoslavia, decentralization separates business management from government administration to a substantial degree. The method used has been to introduce workers' councils in all the larger enterprises and to have them take over the organization of economic activity, the function of manager. The formal fulfillment or over-fulfillment of the plan no longer serves as the criterion of good management. It has been replaced by the success which the enterprise achieves on the market. Since its financial position depends on its business success, the enterprise is, in its free conduct of business, guided primarily by economic efficiency and not by the non-economic considerations which are characteristic of decisions by administrative bodies.

Since the "Law on the Management of Enterprises by Workers' Collectives" was enacted on July 28,1950, the system of workers' self-government has undergone a significant evolution. In order for the system to function successfully it was necessary for workers to acquire experience. By now, every second Jugoslav worker has been elected at least once to a workers' council. Since approximately one-third of the members of councils have by now been reëlected, the necessary continuity is also provided. Statistics show that only 16 percent of the members of the workers' councils consist of office personnel, while skilled workers are most highly represented, with 40.8 percent. It should be stressed that neither a workers' council nor the managing board which it elects constitutes the executive administration. The manager and other executive officers are appointed as experts and technicians by the workers' councils themselves or in coöperation with the bodies of local self-government.

Self-government by the workers and autonomy for enterprises could be fully achieved only after reforms had been introduced in the economic system as a whole which gave enterprises greater freedom of action on the market.

At the outset, workers' councils had a rather consultative character. In the second period, their role became mainly that of members in a profit- sharing institution. In the latest period, however, workers' councils have fully assumed entrepreneurial functions and have become sovereign agents in the economic process.

This evolution could have taken place successfully only along with gradual changes in government fiscal policy. The aim of these changes was to eliminate the disproportion in prices that would be caused by an abrupt disruption of supply-demand relations suddenly freed from the rigidity of the earlier economic régime.

V. THE FINANCIAL INDEPENDENCE OF ENTERPRISES

Manufacturing industries, banks, the building industry and transport are nationalized in Jugoslavia. In handicrafts, however, the private sector still accounts for approximately one-half of all those employed and for one- third of the income from the activity. Public property has been handed over to the workers to manage. And in commerce, the private sector accounts for only a small percentage. In addition to the taxes paid by these enterprises, they must pay interest on that part of the national wealth which is put in their hands to use.

The community-meaning jointly the Federal state, the constituent republics and the municipalities-takes somewhat more than half the gross income of each enterprise. Of the dozen or so levies, only four need be mentioned here; in the aggregate, they account for 92 percent of the community's income.

The first is the interest paid by enterprises on both fixed and working capital as well as on loans which they take either for new investments or for current business. This interest yields 13.4 percent of the community's revenue.

Second is the turnover tax, which at one time represented the main instrument of planned intervention. It is losing more and more of its importance, although it still represents 19.3 percent of the public revenues.

Third is the contribution assessed on gross income; and fourth is a payroll tax. Together these represent the most important part of the community's income, both in amount-59.7 percent of the total-and, even more important, by reason of the principles applied. These principles have undergone considerable changes; at the same time, their main features have put their stamp on the evolution of the system as a whole.

In the first place, from 1951 to 1953, the main instruments for capital formation were the so-called "rates of accumulation," a tax which is graduated in proportion to fixed capital and the size of the labor force. This measure is closely linked to the name of the late Minister of Economy, Boris Kidric, whose indefatigable dynamism was responsible for drawing up the main lines of further development. Experience showed, however, that the system failed to provide sufficient incentive; and, at the same time, the great variety of rates was only a disguise for administrative intervention. That is why in 1954 a new system was applied which took as a tax base the gross profits of the enterprise. As applied, this amounted to a highly developed profit-sharing system. The underlying idea was to stimulate the workers by allowing them to participate in the profits of their enterprises. Year by year the system was improved in the light of experience. As early as 1955, pay scales began to be set by the enterprises instead of by laws which defined salary levels. This increased the workers' share in the profits from 4.8 to 5.8 percent. It was also proved that a comparatively high rate of local taxation diminished the workers' incentive; in consequence, local government's share in the taxes was reduced from 29 to 11 percent. At the same time, the financial resources put at the disposal of enterprises were increased.

Experience proved, however, that the workers' participation in the profits was still too small to offer a sufficient incentive. In 1957, the gross income was taken as the basis for taxation, making the entire income of the workers, and not only their marginal benefits, dependent on the successful conduct of the business. However, the new tax rose steeply with increase in gross income, and this proved to be a discouragement to efficient producers. Experience has now led to the newest reform, by which all enterprises are taxed a flat 15 percent of gross income. The basic idea of this decisive step was explained by Vice-President Todorovic in the following terms: "Instead of securing a balanced growth by impeding those who advance faster, our system has adopted the principle of stimulating everyone to advance as fast as possible according to his possibilities."

With the removal of the steep progressive scale of taxation, enterprises have become even more independent. The entrepreneurial function of the workers' councils is growing in importance, and the income of the workers takes on more and more the character of entrepreneurial income.

One who wished to demonstrate the degree of financial independence of Jugoslav enterprises in 1959 compared with that of American corporations over the 1950-59 period would find that the American corporations paid 49.5 percent of their gross profits in the form of direct taxation and the Jugoslav enterprises, under comparable headings, paid 56.3 percent. Whereas the American corporations paid their owners 29.7 percent of their gross profits in the form of dividends, the Jugoslav enterprises paid the community for the use of their share of the national wealth 13.7 percent. Accordingly, American corporations retained a sum amounting to 20.8 percent of their gross profits, whereas the Jugoslav enterprises were left with 30 percent at their disposal.

This growing financial independence explains how it is that the Jugoslav system has come to the point where enterprises, out of their own means, are contributing approximately one-third of the total amount of investments; where the income of the workers and the standard of living are both rising rapidly; and where efficiency and productivity are also increasing very fast.

VI. SOCIALIST AND PRIVATE COÖPERATION IN AGRICULTURE

While industry is fully nationalized in Jugoslavia, private ownership prevails in agriculture. In 1960 only 9.1 percent of cultivated land was in the socialist sector; yet it yielded 14.1 percent of the total agricultural product and 31.1 percent of the marketable surplus.

Vice-President Edvard Kardelj has defined the government's agricultural policy in the following terms: "In our practice in the sphere of the socialist transformation of rural areas we are pursuing two immediate purposes: to achieve economic results, greater production and higher productivity of labor; and to maintain and strengthen further the genuine political support given by the peasants to the socialist forces, in other words, to secure political stability in rural areas."

Although the rural population diminished by one-third in the course of the dynamic postwar developments, half the people still live on the land. That is why agricultural policy is not merely an economic issue but a political one as well The essence of the rural transformation can be summarized under the following headings: a firm stand against any kind of forced collectivization; a strengthening of the big socialist farms by increased investments, their enlargement by the purchase of land from those who move to urban areas, and the organization there of the most up-to-date processes of production, so that the market demand can be supplied from the socialist sector; the improvement of agricultural coöperatives, particularly by increasing their equipment; and the coöperation of the socialist and coöperative sectors with the individual landholder so that his productivity may also be improved by the use of modern methods and equipment.

The road followed by Jugoslavia in this field is diametrically opposed to that followed by the U.S.S.R. The Soviet Union carried out a total collectivization in the 1930s. Land left to members of a Kolhoz for private use amounted to less than 1 percent of the cultivated land; nevertheless, about 50 percent of the main products sold on the market-meat, milk, vegetables, etc.-came from such land. In contrast, Jugoslavia has only 10 percent of arable land collectivized; this land, however, yields 57 percent of the marketable surpluses of wheat and 53 percent of the marketable surpluses of dairy products.

The Jugoslav experience has shown that a mere change in ownership does not solve the problem. The public and coöperative network, within the predominantly private sector of agriculture, introduces new technological methods and furthers education, training and the modern organization of production.

The same principles of management applied in industry are also valid for the socialist farms, which are managed on the principle of workers' self- government. The members of general agricultural coöperatives are private holders, and have the use of certain coöperative property-some lands, equipment, marketing outlets and the like. They freely elect the managerial bodies. These coöperatives also have their own funds. When induced collectivization was abandoned in 1953, the membership in these general coöperatives decreased, but more than half of all private owners still belong.

The outstanding feature of agricultural development in the last few years has been coöperation between private farmers and the socialist sector. In 1957, only 0.4 percent of cultivated wheat land was covered by this coöperation but by 1960 the figure had grown to 16 percent. Approximately one-third of the private farmers coöperate in one form or another with the socialist sector.

The land reform carried out immediately after the war (affecting about 10 percent of the cultivated land) fixed the maximum size of private holdings at 25 acres. This is the size of farm which the private owner can cultivate by his own labor. This of course does not mean that lands cannot be grouped in larger tracts or that it is impossible to form large socialist farms which can use the most modern technological processes.

VII. GUIDING ECONOMIC DEVELOPMENT

The liberation of autonomous economic forces has not led either to cyclical movements or to other negative features of a market economy. This is primarily because of the controls which have been maintained at certain strategic points.

Investment policy provides the most important of these social controls. Investment funds from decentralized sources are considerable (and show a tendency to increase, from 57 percent in 1959 to 63 percent in 1960). But the investments derived from the centralized funds of the Federal state are of strategic importance. Approximately one-third of the over-all investments made from that source is sufficient to ensure that there will be a balanced growth among the various parts of the economy as well as to encourage growth in underdeveloped areas. In making new investments the enterprises themselves are guided by their estimate of likely profits; and this is even more true in the case of private investments in agriculture and handicrafts, which account for 10 percent of the total amount of new investments. However, the sums invested from the Federal investment fund remain of great importance for accelerating economic growth. The criterion applied here does not neglect the element of profit, but profit is not either the principal or the unique consideration.

The other significant instrument used in guiding the economic process is the turnover tax. Through it the government exercises an indirect influence on prices and thereby on movements of supply and demand. However, the turnover tax is more important in Jugoslav practice as an instrument for collecting revenue than as a method of influencing prices. In 1960 the total turnover taxes collected amounted to 2.5 percent of the value of all investments.

If we examine how this typical instrument of administrative and operational guidance of the economy is used in the Soviet Union and in Jugoslavia we see at once the differences in the two systems. In the period 1950-59 the turnover tax in the Soviet Union represented 46.7 percent of the total budgetary revenues; whereas in Jugoslavia, in 1960, it represented only 19.3 percent of the public revenues. With the introduction of the most recent changes in the economic system, moreover, the policy applied today in Jugoslavia tends to free the turnover tax from its discriminatory effect on prices.

Besides investments and turnover tax, monetary (i.e. credit) policy remains a strong instrument in controlling economic development. The fact that in 1960, 33.2 percent of the investments in fixed assets was financed by means of bank loans, and that the percentage was 38.7 in the case of working capital, sufficiently illustrates the role which monetary policy can play in the regulation of bank operations.

VIII. INTERNATIONAL ECONOMIC RELATIONS

Jugoslavia's successful efforts in the course of a decade to evolve more liberal machinery for the operation of a planned socialist economy enabled her to proceed during the past year to reform in the field of foreign exchange. This should lead toward the convertibility of currency and a more intensive participation in international trade. On the one hand, this action was the result of considerations of principle; on the other, it was a logical extension of the course taken ten years ago in internal economic policy.

Jugoslavia opposes the formation of economic blocs behind protective walls not for reasons of political expediency but because she has strong feelings of principle regarding the question of peace and the world's general progressive development. Jugoslavia is known today for her consistent policy of active and peaceful coexistence. What could be more natural than to apply the same principle in the field of international economic relations? By liberalizing her foreign economic relations Jugoslavia has proved in practice that the existence and further development of the socialist system does not require either rigid centralized operational planning or a monopoly of foreign trade or isolation within the so-called "socialist world market."

Moreover, the opening of economic frontiers and the liberalization of relations with other countries is imperatively demanded by the international development of the system itself. The market cannot serve even as an indicator of relative efficiency if the national economy remains isolated from the international market. Accordingly, the search how best to allocate resources and attain the greatest income called for the elimination of barriers separating Jugoslavia from other countries.

Until recently Jugoslavia maintained protection by a very complicated system of multiple exchange rates. This was a remnant of the former state monopoly in foreign trade. This year Jugoslavia introduced the customs tariff system; the protective rate in the case of some infant industries is still high, and some export branches are subsidized. The success of this operation depends, of course, on whether it will lead to greater exports. In view of the fact that the country has no large monetary reserves (although aggregate debts represent only 1.7 percent of the national wealth), it was necessary to apply for assistance from abroad. This was offered by the United States, the International Monetary Fund and a majority of the West European countries.

The policy of dynamic economic development pursued in the last decade has produced deficits in the balance of payments. But whereas in the 1953-56 period that deficit represented 45.6 percent of import capacity, in the 1957-59 period it decreased to 24.3 percent, owing to considerably increased exports. One of the targets of the Five Year Plan is to reduce that deficit to 5 percent and by 1965 to remove it entirely. The balance-of- payments deficit has been aggravated by recurrent bad weather, chiefly droughts, which affected the country in 1950, 1952 and 1954, and now has done so again in 1961. This explains the fact that three-quarters of the balance-of-payments deficit is accounted for by food imports, mostly from the United States. The assistance received by Jugoslavia in the past years has contributed substantially to the economic results which she has achieved.

Thus we see that a decade of intense economic development by the methods here described has brought considerable results. One indication of this is the rate of increase in the national income (although the method of calculation is slightly different from that in Western countries). In the 1948-52 period the rate of growth remained at the prewar level of 1.9 percent; in the 1953-56 period it increased to 8.4 percent; and in the period of the Third Five Year Plan, 1957-60, it reached 13 percent. The average rate of growth in the postwar period as a whole is 7.2 percent. This is one of the highest rates of growth in the world for that period. A striking feature is the fact that the ratio of efficiency in the use of capital greatly improved, which means that the growth was not predominantly the result of increased employment and new investments but that a great factor was increased productivity. There is no doubt that by releasing the creative impulses of the working people the economic system has played a considerable role both in raising the country from economic backwardness and in creating the conditions for the development of free relations with all the countries of the world.