Foreign Affairs: 100 Years
The Future of History
Can Liberal Democracy Survive the Decline of the Middle Class?
LAST spring the Soviet leaders, aroused by the solemn reiteration of Titoist principles in the draft program of the Seventh Congress of the Jugoslav Communist Party, chose to open a second ideological crusade against the Belgrade heresy. Surprisingly enough, Soviet recriminations, set forth in considerable detail in various issues of the Soviet magazine, Kommunist, made no direct mention of Jugoslav economic policies, permeated as they were with "revisionist principles." The battle against revisionism had to be waged by more subtle means: the Kremlin word-mongers aimed their invectives at Tito's notion of the "gradual withering away of the state" under socialism--a notion, of course, patently at odds with Stalin's old teaching about the need to strengthen the state in the period of transition to Communism in order to repress counter-revolutionary forces.
Tito's gradualist views had provided theoretical support for his policy of loosening the bureaucracy's hold over economic life. His doctrinal error could be assailed with impunity by the Soviets, whereas attacks on specific economic reforms ran the risk of backfiring if discerning Soviet readers happened to find the Jugoslav scheme of decentralization more consequential and more attractive than the one the Politburo had been seeking to impose on the Soviet economy since 1957. Already the idea of workers' management, which had been given concrete shape in the Jugoslav workers' councils, had been far too popular in Poland and Hungary after October 1956; and the other satellite economies would have been seriously contaminated if strong repressive measures had not been taken by the local Communist authorities. All in all, the Russians were wise to keep these infectious cultures as hermetically bottled as they could.
Even during the course of their first propaganda campaign against Titoism, which, starting in 1948, began to taper off only after the death of Stalin in 1953, the Kremlin agitators had steered away from serious debates over the merits and demerits of decentralized socialism.
At first, in the months following the Cominform resolution of June 1948, the Jugoslavs offered Stalin no ground for criticism of revisionist activity in the economic sphere. Central planning by administrative fiat still reached into every nook and cranny of economic life; rationing of consumer goods prevailed; and a class war was being waged which bore hard on the remains of private trade and industry. If anything, the Jugoslavs were guilty of leftist deviations both before and just after the 1948 break: the Cominform sheet, For a Lasting Peace, For a People's Democracy, declared in July 1948 that the nationalization of medium and small-scale industry had been carried out too hastily in Jugoslavia and had worked hardships on the urban population. It was also argued that the newly introduced grain tax, aimed against the richer peasants, would tend to disrupt food supplies.
Tito's forced collectivization drive of April and May 1949 also failed to please the Russian critics who objected to the peasants being pressed into collectives before Jugoslav industry could furnish the tractors and agricultural machinery essential to the efficient operation of large-scale farms. Ana Pauker, in a mid-1949 article written for the Cominform organ, noted with ill-concealed satisfaction that cattle had been slaughtered en masse during the months of April and May when the number of collectives had been doubled. Other writers harped on the revisions of late 1948 in the Jugoslav Five-Year Plan, which demanded still more sacrifices from the population for the sake of hastening the completion of key investment projects and for stepping up defense production.
The stress on accelerated industrialization had more complex origins than the Cominform papers could afford to disclose. Soviet Russia, soon after her dispute with the Jugoslav Communist Party had broken out, cut her own commercial ties with Jugoslavia and prodded her allies to do the same. Jugoslav trade with Eastern Europe, which had made up about half of the total volume of imports and of exports in 1948 (as against less than 20 percent in the late 1930s), dropped by seven-eighths in 1949 and came to a near standstill in the following years. Domestic industry had to plug the gap, at least until such time as trade could be switched back toward the West, with its more rigorous specifications and commercial terms. But even if trade ties had not been slit, Tito would have turned his political autonomy to account by building up Jugoslav industries to lessen dependence on Soviet-bloc imports. It was a common cause of complaint against Russia in official circles that Stalin, before the break, had wished to turn Jugoslavia into an agrarian dependency. No wonder the slogans of the first May Day after the original Cominform attack exulted over the newly-launched manufacture of trucks, which had formerly been imported from Czechoslovakia.
The collectivization drive and the more pronounced trend toward autarchy might not have seemed entirely out of keeping with past policies; but certain reforms proposed at the Second Plenum of the Central Committee of the Jugoslav Communist Party in January 1949 clearly pointed in a new direction. In his speech, Boris Kidric, who was to become one of the chief architects of the transformation of the Jugoslav economic system, first ridiculed the "fetishism" of administrative planning and then went on to argue that it should be possible, at least in the consumer goods sector, "to make supply and demand serve as instruments for planned distribution." The resolutions of the Plenum noted that the chief obstacle to improving the quality and the choice of goods in socialist trade was the persistent reliance on administrative rationing. Free sales could achieve the goals of rationing, provided the purchasing power of households did not exceed the value of goods placed at their disposal. The proportion of the output of state-run plants earmarked for unrestricted sale --at government-regulated prices--should therefore be increased.
Starting with this modest step, the Jugoslavs proceeded in the course of the next four years to dismantle the elaborate economic structure they had erected since the war. The economic appendages of the state had already begun to wither away.
In the second half of 1949 and in early 1950, nationalized enterprises in the textile, rubber and leather, coal-mining and power industries were transferred from federal control to the supervision of the five constituent republics. At the same time many plants of secondary importance formerly attached to the republics were entrusted to local peoples' councils. Several of the "General Directions," government agencies exercising operational control over individual industries, were liquidated. Economic ministries were reorganized into inter-industrial councils in which both federal officials and republican ministers were invited to participate. The idea behind these shifts, according to Kidric, was to vest operational controls in lower administrative organs and at the same time to strengthen "over-all planning" by relieving the planners of laborious detail.
In 1950, a move toward decentralization was also made in the socialized sector of agriculture: all tractors and agricultural machinery were sold by the machine tractor stations to the collective farms, eight years before the Politburo thought fit to introduce a similar measure in Soviet Russia.
It soon became evident that more drastic measures to free internal trade would have to be taken if recurrent breakdowns in the provision of consumer goods to the population were to be averted. For the devolution of planning responsibilities to republican and local agencies seemed of no avail in correcting the uneven distribution of rationed and free goods: deliveries to retail outlets were seldom made in season or in the locality where they were most urgently needed. In the light of these observations, it was ordered in April 1950 that all goods not on the rationed list were to be sold "at prices corresponding to market conditions," which could vary according to time and place as supply and demand would dictate. Trade in these commodities henceforth was to be free, "unfettered by planned distribution or by any restrictions on sales within a given region or locality."[i] Though directors of wholesale trading enterprises were nominally empowered to fix prices, for at least a year federal and republican agencies continued in practice to have the last say in price-setting. Additional legislation had also to be enacted before retailers in the socialized network of distribution could choose their suppliers freely from among the nation's producers and wholesale outlets.
The most publicized reform of the year 1950 was the creation of the workers' councils in June. These councils, whose members were elected from among the entire staff, were charged with the analysis and approval of production and financial plans and with the general supervision of the enterprise's activities. The day-today business of workers' management was carried on by a "management board" of 3 to 11 members representing the unwieldy council (which sometimes numbered over 100). The director of the enterprise was responsible for all operational decisions, but his policies were subject to review by the management board. The workers' council could also instigate dismissal proceedings against the director if his management seemed unsatisfactory.[ii]
As long as firms were bound by federal, republican and local plans, which predetermined most technical and financial decisions, workers' management remained a near-empty shell. This shortcoming was stressed by Kidric in August 1951 upon introducing to the public a sheaf of new reforms, which, more than any previous or subsequent legislation, were to shunt the Jugoslav economic system away from the Soviet economic "model."
This time it was not just a matter of delegating responsibility for detailed planning to lower organs in the administration. Operational planning was scrapped along with its paraphernalia of allocation and production orders, its fastidious inventory checks and its incessant controls. Eventually even the all-powerful Planning Commission was deprived of its executive powers and turned into an advisory council of the Government for drawing up long-range development plans and analyzing current economic conditions.
By whom or by what agency were the output and consumption decisions of producers to be coördinated now that the authorities had resolved to do away with the bureaucratic supervision of the economy? Coördination was to be achieved through a flexible price mechanism, which would keep markets in balance, while the state, through indirect financial controls and its centralized investment policy, would nudge the economy along toward the long-term goals approved by the Party.
Prices were freed in three steps. First, the planners worked out new "economic prices" for raw materials and semi-fabricates. These prices were roughly on a level with the free prices of non-rationed consumer goods (which far exceeded the former prices of administratively rationed producer goods), while imported materials were priced according to a higher, more realistic exchange rate. Second, after January 1, 1952, all producers, wholesalers and retailers of manufactured goods were invited to set prices for their products on the basis of market demand and costs, in line with the recently established level of material prices. In the third phase, which was put off until May 1952 to avoid upsetting the freshly established markets, prices of raw materials and semi-fabricates were finally allowed to seek their natural level.
The stimulus given to the management and staff of socialized enterprises to mind costs and profits and take advantage of the new freedom to set prices was supplied by more generous regulations with regard to the allocation of profits. Formerly the state had arrogated to itself all but a tiny share of profits left to the enterprise as guerdon for its efforts. Now the state and the enterprise were to share accrued profits more equally, according to predetermined percentage shares. Certain surtaxes could be levied on "surplus profits" (windfalls due to price changes), but not so indiscriminately as to cripple profit incentives. As the system developed, workers and employees of most industrial firms managed to earn the equivalent of one or two months' extra pay a year from the profit fund earmarked for distribution to the staff.
Other liberalizing measures were introduced at about this time. The remains of consumer rationing were eliminated toward the end of 1951 and in 1952, as were also compulsory deliveries of agricultural products by peasant farms. In January 1952, the allocation of foreign exchange to importers was decentralized by the creation of autonomous pools for the different sectors of the economy; in July, exporters, for the first time, were authorized to retain a substantial part of their foreign exchange earnings (nearly half), from which they could draw for their own import needs or which they could sell on a government-sponsored exchange market at higher than official rates.
The adoption of these measures was undoubtedly facilitated by the receipt of foreign credits and outright grants from the United States, the United Kingdom and France. This tripartite aid had gotten under way in 1949 but it had been greatly expanded starting in 1951.[iii]
It took at least until the middle of 1952 before the old contractual and routine ties that had been knit between socialized firms under the defunct planning system had been loosened sufficiently to allow the new system to operate. By that time producers and distributors began to look around in the market and found ways of improving their profits by supplying items in demand and by substituting cheaper materials in their production process. They also began to take advantage of their freedom to set prices. Toward the end of 1952 prices of steel and non-ferrous metals already showed a marked upward trend. But by and large the price level for industrial consumer goods remained remarkably steady throughout 1952. This absence of any violent price movements in the wake of a complete transformation of the economic system bears witness to the care and ability exercised by the top planners in carrying out their reforms.
Still, it is fair to point out that the policy-makers would probably have been less successful if they had not kept a firm grip on the centralized investment budget (with an eye on the level of purchasing power) and on export licenses (making sure that goods in short supply did not leave the country). By taxing producers roughly in proportion with their wage bills, the authorities bore directly on production costs and influenced prices and output. The banking system, which now became the main vehicle for direct government intervention in economic affairs, was in a position to grant or refuse short-term credits to traders and producers for holding inventories in keeping with the central Government's price-stabilizing policy. By moral suasion and by threats of outright controls the Government also exerted pressure on managers of firms intent on raising prices; many firms were in a monopolistic position and would have manipulated prices to their advantage if it had not been for these inhibitions.
With these numerous qualifications in mind, we must still marvel at the temerity of the Jugoslav leaders in going ahead with sweeping reforms in 1952, a year in which the balance of payments was expected to deteriorate and the level of real wages of the population probably could not have been maintained, even if harvests had been normal. As it turned out, long stretches of drought plus spring frosts cut down yields of grain, vegetables and fruits by nearly 50 percent. Even with the economic aid proffered by the Western powers, which covered around 40 percent of imports, the Jugoslav Government was not able to forestall a 20 percent reduction in food consumption per inhabitant. Fortunately, industrial consumption fell off very little, at least until the last months of the year when imports of cotton, wool and leather had to be cut drastically to permit increased food purchases abroad.
Under these calamitous circumstances, it would not have been surprising if rationing had been reinstated for both consumer and producer goods. Actually, the measures taken by the Government to keep home markets in balance were relatively benign: export controls were tightened, the proportion of foreign exchange that exporters were allowed to retain out of their earnings was cut from 45 to 20 percent, and taxes were raised on the surplus profits of socialized enterprises.
The Government's liberal policy gained further momentum in 1953. Near the beginning of the year, Vukmanovic-Tempo, who played a decisive rôle in economic affairs at the time, called for the removal of the last vestiges of bureaucratic control over enterprises, stressing the job still to be done in giving managers more autonomy from arbitrary taxation and in contriving more flexible foreign trade regulations.
As a result of these general directives, the financial obligations of an enterprise toward federal, republican and local organs were fixed in such way that it became the residual claimant of profits rather than an equal partner with state organs in sharing these profits as it had been in the past. Measures were also taken to put the National Bank's credit extension policy on a more strictly commercial basis. Credit-worthiness was no longer to hinge on the priority of an industry in the general development scheme of the country or on some mechanical check of the applicant's sales-to-working-capital ratio but on its proved ability to repay and on its willingness to offer a high rate of interest for loaned funds. Sealed bids were submitted for (decentralized) investment credits and for working capital to the various branches of the National Bank and, later, to the newly founded Investment Bank, which were instructed to turn down applications offering less than a minimum interest rate. This minimum was not set in advance but depended on the supply of funds to be auctioned off and on the range and distribution of bids tendered. It is doubtful whether commercial loans were ever awarded by capitalist banks on such simon-pure competitive terms.
The auction principle for allocating scarce factors of production was highly popular between 1953 and 1955. Large quantities of wool, raw hides, rolled and forged steel products, lumber and citrus fruit, of both imported and domestic origin, were at one time or another sold publicly in this manner. It was found that the geographical allocation of the materials, which resulted from the auctions, differed radically in certain cases from the allocation that would have been achieved through the old administrative "key" for breaking down rationed quotas by region. This was a telling point against bureaucratic meddling, as long as the price system was thought to function sufficiently well: for otherwise the successful bidders might neither be the firms that were in most acute need of the auctioned materials nor those that could turn them into the most valuable commodities in the authorities' scale of social priorities.
Indeed weighty arguments had to be found to defend the auctions, as by 1955 the shifting winds of policy had already begun to erode the established principle of non-interference in domestic markets and in price formation. Back in May 1954, the state had imposed a ceiling on a few raw materials. By mid-1955, the list numbered 40 materials, including steel, coal, gasoline, copper and lumber, altogether amounting to some 50 percent of the total value of materials bought by industry. The reason for these controls, according to one commentator, was that all attempts to curb price increases had failed and no other course availed but to resort to administrative measures. Producers would not have been in a position to boost prices if it had not been for inflationary pressures which had upset the financial equilibrium of the state plans. Contributing causes to this inflation were a harvest failure in 1954, delays in the scheduled completion of investment projects, above-plan increases in the wage bill and the need to force a higher volume of exports in order to meet foreign obligations.
The increasingly overt use of monopoly power by producer-goods industries also helped to call forth the Government's repressive measures, though one might argue that the authorities would have been better advised to break up the monopolies than to obliterate the symptoms of their power. The industrial associations of socialized firms that had come into being more or less spontaneously in 1953 and 1954 should perhaps have been squashed at an early stage (irrespective of the contribution they made to technical progress by disseminating information among members). For they turned out to be the focal point for formal and informal agreements of a collusive nature that might otherwise have proved unworkable. After the state had fixed maximum prices, the associations could hardly be dissolved, for they now performed an essential bureaucratic function: wherever prices were too low to ration off the demand of consumers, the association was relied upon to allocate available supplies to consumers according to the order of priorities recommended by the state.
The officials of these associations with whom I talked in the summer of 1958 claimed that consumers preferred to be at the mercy of their suppliers rather than of a centralized governmental agency; at any rate, they urged, all interested parties were represented and their needs most carefully considered when materials in short supply were meted out. Serious complaints were said to be infrequent. These rosy views of the distribution process should be regarded with caution, in the light of frequent references in Jugoslav trade papers to the neglected needs of certain classes of consumers (particularly wholesalers).
Backsliding toward administrative methods proceeded apace throughout 1955 and 1956. Exporters were compelled to yield up to the state all but about 2 percent of their foreign exchange earnings. The interest-rate auctions for working capital and for short-term credits were gradually allowed to lapse; the auctions for investment credits survived, but only pro forma, as by 1956 the interest rate bid by prospective borrowers no longer counted for much in a bank's final decision to approve or to reject applications. To an increasing extent, administrative criteria--including judgments of social priority--again began to shape credit policy.
In agriculture the liberal phase of government policy got under way later than in industry, but as yet there have been fewer retrenchments. The number of farm collectives had shown a gradual fall from 1950 on, but it was not until 1953 and 1954 that peasants were allowed to desert these unpopular institutions in droves (the number of collectives dropped from 4,524 in March 1953 to 1,107 in 1954). Credits were also extended to private farmers in 1954. Soon after, free trade in land was restored; but the maximum number of acres a peasant might legally own was about halved (it is now anywhere between 22 and 33 acres).
Not all moves in the spheres of industry and trade have been retrograde in the last three years. As a matter of fact, it is argued by some Jugoslav economists that selected physical controls had to be reinstated because the authorities were willing to sanction more autonomy in the investment field, letting the organs of local government and socialized enterprises themselves take on the prime responsibility for husbanding the nation's capital resources. In the late 1940s, almost all investments had been funnelled through the state budget; by 1957 the republics, the local peoples' councils and socialized enterprises accounted for two-thirds of the total investment program. This financial decentralization reduced the state's power to steer the economy along the course mapped out in its long-range plans. Investment projects sprouted in all parts of the country, which had no place in the planners' timetable, but added their bit to the pressure of inflation.
There was also a more subtle disadvantage to letting communes and districts do their own capital budgeting: local organs, pressed for revenue, taxed the output of industrial producers and encouraged them to raise their prices. This was one of the chief arguments brought forward by Jugoslav economists early this year in favor of widening the scope of price controls.
The inflationary problem had been aggravated during the excellent harvest year of 1957 by the spilling over of purchasing power into the hands of the peasants who bid up the prices of industrial goods and building materials. The Government's solution took the form of an executive decision, dated February 15, whereby industrial producers and wholesalers in socialized trade would from now on have to justify price increases for most products to a Price Office (Ured za Cene). Within a delay of 30 days after receiving the papers vindicating the firm's decision to raise its prices, the Office could "recommend appropriate measures" to superior authorities. In practice, this meant that the Office had veto power over price increases. The peoples' councils of industrial centers might also decree maximum retail prices for essential food products in their locality. After a number of applications for price increases had been rejected in the first months of operation of the Price Office, this potential veto acted to inhibit the price policy of potential "speculators"--as well as of enterprises with cogent reasons for adjusting their prices to new market conditions.
Regulations came out last October which went even further toward balking any price increases. Aside from the Price Office, the State Secretariat (ministry) in charge of trade has been made responsible for the over-all supervision of price controls. Local peoples' councils have been given far-reaching prerogatives in controlling prices of both socialized firms and private handicrafts. Illegal price boosts are to be treated as "speculation" and the persons responsible (among others, the managers of socialized enterprises) are to be punished according to criminal law. The level of local taxes, the land and real estate rents accruing to the communes and the prices charged for communal services are frozen at present levels.
This is where matters stand now; though I fear that all this tampering with the price system must make for still more administrative encroachment over the remains of market freedom. Once prices no longer reflect the state of market demand, they cease to be valid indicators for making investment decisions or for allocating other resources. They can no longer give expression either to consumer desires or to the priority scale of the authorities, so that the planners must step in with more physical controls to block the market forces which artificial prices have brought into play.
Can inflationary forces in 1958 be so much stronger than in 1952, when the country faced starvation and the burden of war production and investments was crushing the population, as to warrant a retreat from the courageous reforms hammered out in this trying period?
Consider how far the Jugoslav economy has traveled since 1952. Industrial production, which had failed to rise in 1951 and 1952 because of a shortage of imported raw materials, has just about doubled in six years, according to the fairly creditable official index. A crucial point is that the growth of consumer industries has lagged only a few percentage points behind the growth of heavy industry, in marked contrast with the situation in the economies of the Soviet bloc--where the gap between the two indexes has usually been wide. The productivity of labor in industry has risen about 25 percent (nearly 9 percent in 1956, when a drop in the investment budget and in purchasing power spurred industrial enterprises to trim their labor costs). In 1957, the physical volumes of imports and exports were both up 65 percent over 1952. Observers who have watched at close hand the evolution of the Jugoslav economy in the last three years agree that there has been a remarkable improvement in the supply, the quality and the choice of goods available to the population.
This information makes it evident that the decentralization of economic activity has not stunted the growth of industry in Jugoslavia as some Polish critics have contended. If anything, local government organs and enterprises have been too eager to spend their money on investment projects, for immediate gains in productivity, and on "social overhead," such as roads and communal services, promoting long-range growth.
In point of fact, the inflation has been only moderate; it has almost exclusively affected the prices of foodstuffs, which are about 60 percent higher than in 1952. Textiles are cheaper on the whole than they were in 1952. The prices of most producer goods not subject to control have shown only small increases. Since movements in the general index of retail prices seem to be most closely associated with fluctuations in agricultural output, ceilings on industrial prices are not likely to help materially in stabilizing the cost of living.
On the contrary, conditions have never been as good for the further liberalization of economic life. Jugoslav officials are the last to deny the accomplishments of the reforms of 1952 to 1954: the far smoother and more efficient channels of distribution, the revived emphasis on economic calculation, the more-than-perfunctory care for socialized property induced in workers and management by the profit incentive, and the greater effort now made by producers to cater to the desires of consumers, whether they be purchasers of lathe-turrets or of high-laced boots. Yet these officials sometimes forget how much remains to be done. Many industries--including steel and non-ferrous metallurgy and heavy chemicals--are not behaving competitively. Directors of enterprises have insufficient power to hire and fire workers (when firms are forced to curtail output, many inactive workers are kept on the payroll who could be employed more profitably elsewhere). There is still not enough incentive from profits to spur managers and workers to put all their talent and energy at the disposal of their enterprise. Investment resources are frequently denied to those industries and firms that could utilize them best by the standards of the market. Finally, the Jugoslav market has been insulated from world prices by means of a multitude of exchange rates (one for each major product or group of products), so that even prices of goods not subject to direct controls have tended to be out of line with their relative scarcities.
These are things that could be set right, given the will to perfect the Jugoslav model as it was conceived in 1952.
Otherwise the Jugoslav economy is in danger of backing up into the sort of mixed system that prevailed in 1950 and 1951: administrative decentralization with reduced coördination of physical plans at the top level and no flexible price system to take its place. If it came to this, the Jugoslavs could join hands with the Poles, the Czechs and the Russians who, starting out from the other end, have reached a similar stage of decentralization--but are still entangled in their own red tape.
A lesson may be drawn from the Jugoslav experience with institutional reforms. When all the reins of political authority have been gathered in a few hands and jobs have been created for a luxuriant officialdom, the dispersion of economic power requires conscious effort and determination. For government-decreed decentralization is not a natural order, toward which all artificial deviations tend to revert; its delicate balance is perpetually undermined by bureaucratic interference and it forever threatens to slip back toward the opposite pole of hypercentralized authority. It is to be hoped that the Jugoslav leaders, alive to this danger, will meet the current propaganda assaults of the Soviet Union, not with compliance and backsliding, but with the vigilant preservation of the goals already achieved.
[i]Sluzbeni List, 1950, No. 252.
[ii] For an official view on the workers' councils and, generally, on Jugoslav economic reforms, see "Evolution in Jugoslavia," by Edvard Kardelj, Foreign Affairs, July 1956.
[iii] From 1951 to 1955, the Jugoslavs received on the average nearly $200,000,000 a year from abroad, largely in the form of grants-in-aid and agricultural surpluses from the United States.