Yugoslavia: Trouble in the Halfway House

The news reports out of Belgrade speak of a troubled country with a stagnating economy, ruinous inflation, out- of-control foreign debt, rebellious workers, and a defiant citizenry. These problems would be ominous in any country, but they are especially so in Yugoslavia. One fear is that mounting troubles could force Yugoslavia back into the tight Soviet orbit it escaped in 1948. There are also worries of exacerbating tensions among the different national groups in the Yugoslav federation. Another fear is that Yugoslavia—whose individual countries helped create the term “Balkanize”-could simply unravel as a unified nation.

Yugoslavia’s current problems are surprising because the country has been a showcase for “workers’ self- management.” The country’s troubles must be disappointing many intellectuals in the U.S. who wanted to believe Yugoslavia had created a golden “halfway house” between capitalism and Communism. Yugoslavia was supposedly proving that there can be a “market socialism.” But the dream is becoming a nightmare. Once seen as an exciting wave of the future, this hybrid socialism has fallen on hard times. And workers’ self-management, the vaunted “third way,” may be much of the problem.

Some believe that Yugoslavia’s centuries-old religious and ethnic rivalries add to its troubles. The country also suffers from the same ills that threaten many mixed economies, including our own. Yugoslavia’s major problems include excessive public spending and a system that hampers the market and distorts capital investments. Its policies encourage excessive consumption and the maintenance of inefficient industries. Its decentralization, a good thing under some conditions, has divided the country into protectionist enclaves. At the same time, despite its decentralization, Yugoslavia is also a Communist country, still infected with the flawed vision of Marx and Lenin.

One of the tragic outcomes of World War II was the Communization of Eastern Europe into what became known as the Soviet bloc. Yugoslavia, organized as a Communist state in 1945, seemed particularly menacing with its 300,000-man army and aggressive leadership under Marshal Josip Broz Tito. Though badly crippled by the war, this new Communist state appeared to be a dagger poised for future attack on its neighbors.

Break Led to New Course

Three years later, however, the shocking break between Tito and Stalin set Yugoslavia on a new course. It remained Communist in name and government, but it adopted the new economic policy which came to be called “workers’ self-management.” Restrictions were gradually relaxed in practice, and thousands of people left the country with the government’s blessing to become guest workers in West Germany and other prospering countries. Industrial output climbed. Belgrade became a modern city with large department stores, traffic jams, and towering office buildings. Though large-scale private ownership was still banned, workers’ self-management gave managers considerable latitude in business negotiations. Much of the country’s agriculture continued to be in private hands, and a thriving private enterprise sector developed under special provisions which were variants of Communist doctrine.

Tito, a harsh Communist with amazing luck and cunning, became a Yugoslav folk hero, although not to everybody. Years after his death, he is still hated by dissident Serbians and other Yugoslavs who believe leftist influences in the British and American governments tilted support his way during World War II. This helped put Yugoslavia in the Communist camp while dooming another wartime resistance leader, General Draja Mihailovic (executed by the Communists in 1946). In the West, Tito received a consistently favorable press, and he was considered so indispensable that many feared the country would fall apart following his death. He did have the political skills to form a government representing the various Yugoslav republics, something that had been lacking in the Serbian-controlled monarchy which headed Yugoslavia following its formation in 1918. Tito died in 1980, but it’s doubtful that his death had much to do with Yugoslavia’s current troubles.

Workers’ Self-Management

Milovan Djilas, the former Tito associate who became an outspoken critic of the Communist system, claims credit for the adoption of workers’ self-management in the country. According to his recollections, he made the proposal in the spring of 1950, some months after the break with the Soviet Union. It occurred to him, he said, that Yugoslavia was now in a position to “start creating Marx’s free association of producers.” He explained the proposal to two other associates in the Tito circle, Boris Kidric and Edvard Kardelj. Winning support of other leaders, Djilas and Kardelj finally took to Tito the idea of introducing a workers’ council bill in the parliament. They pressed him hard because they believed it was an important step, Djilas recalled. He wrote, “The most important part of our case was that this would be the beginning of a democracy, something that socialism had not yet achieved; further, it could be plainly seen by the world and the international workers’ movement as a radical departure from Stalinism. Tito paced up and down, as though completely wrapped up in his own thoughts. Suddenly he stopped and explained: ‘Factories belonging to the workers—something that has never yet been achieved!’ A few months later, Tito explained the Workers’ Self-Management Bill to the National Assembly."^[1]

The main feature of Yugoslavian self-management is that of control of each enterprise by a representative body called the workers’ council. The idea was not new, and in Russia it had been tried after the 1917 revolution. But in the Soviet Union, central direction of economic affairs soon replaced economic decision- making by the councils. In Yugoslavia, on the other hand, the councils were constitutionally empowered to run the various enterprises. Self-management was not limited to business and industry, but was also applied to service bodies such as the post office, railways, telephone service and, to a certain extent, universities and similar organizations.

There was also a provision for private enterprise if no more than five were employed in the individual activity. Most of the privately-owned and operated businesses emerged in such fields as construction, personal services, restaurants, trucking, and farming.

There were several reasons why the new plan made good politics for Tito and his group. For one thing, they continued to be Communists and, thanks to Djilas’ reasoning, workers’ self-management could be defended as sound Marxist doctrine. They were also disillusioned by what they called .the “bureaucratic collectivism” which was choking off economic growth in the Soviet Union. Beyond that, the decentralized nature of self- management made political sense because of the severe rivalries and jealousies among the Yugoslav republics.

Not Really a Single Nation

Central control is an explosive issue in Yugoslavia in view of its ethnic and regional diversity. Yugoslavia actually means “Land of the South Slavs,” but it goes back only to 1918 as a unified country and has had its present name only since 1929.^[2] The present ethnic makeup of Yugoslavia’s 23 million people is 36 per cent Serbian and 20 per cent Croatian with the rest being comprised of Bosnians, Slovenians, Macedonians, Albanians, and a few other national groups. One of the persistent jokes is that Tito was the only Yugoslav. all others stubbornly retaining their ethnic identities! The fear of Serbian domination also persists in Yugoslavia, where Belgrade is the capital of Serbia as well as of the federation.

In the beginning, self-management and relaxed controls seemed to produce economic wonders in Yugoslavia. This may have led observers to think that the Yugoslavs had found the miraculous formula that would blend the dynamism of capitalism with the supposed democracy of socialism. Self-management seemed to work so well for a time that its contradictions and problems went unnoticed.

Actually, there were good reasons why Yugoslavia could expect substantial growth once the bureaucratic fetters were removed from its basic enterprises. The country had expectations of comparative advantages in many fields: mining, shipbuilding, heavy manufacturing, agricultural products, tourism, chemical fertilizers, and knitted and leather clothing. It had an energetic labor force, good seaports, and access to European trading partners who were soon to have spectacular growth.

Growth and Then Trouble

The 1960s and early 1970s seemed to be bright years for Yugoslavia. The country’s exports surged to exceed $10 billion, two-thirds of this amount to countries outside the Communist bloc. Many of Yugoslavia’s industries seemed highly competitive in world markets, and there were even astonishing reports that efficient Yugoslav shipbuilders wrested contracts away from the Japanese. Visiting a construction equipment manufacturing firm in the U. S., one might meet teams of earnest, friendly Yugoslavs who had come to study new equipment methods. And since Yugoslavia itself is a tourist’s paradise, thousands of visitors from the West came to enjoy the country’s beaches and mountains.

All this seeming prosperity masked some serious problems. For one thing, Yugoslavia’s debt was becoming unmanageable. Despite growth, the country could not create sufficient jobs for its own population, a main reason why the government was willing to permit 600,000 people to become guest workers in other countries. The individual enterprises also were not financing their own growth, and most of the capital spending came from money borrowed outside the country. It was also true that much productivity came from small, privately owned businesses which had to operate very discreetly in order to survive under the watchful eyes of bureaucrats who still gave allegiance to Communist doctrine.

By the 1980s, stories about Yugoslavia were beginning to include terms like “crisis” and “economic troubles.” The Olympic Winter Games of 1984 focused attention on Yugoslavia, but also “masked” the country’s problems, according to U.S. News & World Report. This article mentioned an inflation rate of 50 per cent, public unrest leading to strikes, a crippling national debt of $19 billion (now a billion higher!), 15 per cent unemployment, and shortages of basic food supplies and even gasoline.^[3] The problems continue to intensify.

Usus Fructus

Some observers attribute Yugoslavia’s troubles to “high living” and the indifference of workers. It would be more helpful to study the system—and particularly “workers’ self-management,” since it controls the performance of the major enterprises. It is becoming painfully clear that self-management looks good only in comparison with harsh centralist economies. In competition with privately owned enterprises in the world marketplace, it is beginning to stumble badly. For one thing—despite Tito’s glowing statement—it is not worker ownership. Professors Erik G. Furubotn and Svetozar Pejovich concluded that the accurate term to apply to the workers’ claims in these enterprises was usus fructus. In American legal terminology, usus fructus is the right of use without ownership, as when a person is given the full use of a company automobile or some facility. They pointed out that the crucial distinction between full ownership and usus fructus carries behavioral implications which were not recognized by Yugoslav economists.^[4]

These “behavioral implications” were predictable. The economists believed workers in control of enterprises would attempt to gain higher incomes (for themselves) through the strategy of reinvestment in the firm. As it turned out, however, workers shunned this type of long-term thinking because there was little immediate gain to them from increasing the value of the firm’s assets (they cannot buy and sell shares, as in a stock market). Their investments were channeled to things that were most likely to benefit them directly. Not surprisingly, many of these investments amount to current consumption at the expense of future productivity. When workers run the show, Barry Newman noted in The Wall Street Journal (March 25, 1987), the one thing they don’t do is invest their profits. “They do award themselves fat raises. Then they borrow. And when debt ruins the economy, inflation tops 85% and their buying power collapses—they strike.”

True “ownership” by workers would provide more incentive for real reinvestment—but this is blocked by socialist doctrine. And even if workers were more devoted to reinvestment in the enterprise, one wonders how many council groups have the competency to make shrewd and productive decisions. In U.S. companies, even highly trained managers frequently make bad capital spending choices which they regret later.

Another appalling problem in Yugoslavia is protectionism practiced by the various republics. Though decentralization is supposedly an advantage, it becomes a liability when each republic jealously guards its own turf in ways that bring about irrational and costly practices. According to a 1984 New York Times report, these rivalries are carried to such extremes that each republic has its own share of the railway network. A train has to switch engines every time it crosses republican borders, replacing, for example, a Slovenian engine with a Cro- arian one, and later with a Serbian one. Disputes over operation of the rail network were so intense, according to the article, that there was even a question whether there would be enough coal in Belgrade that winter—though coal production was up. Nothing moved while the republics argued over who would carry coal!^[5]

The same article also explained how politicized workers’ management was keeping a nickel plant open and even expanding at a cost of millions of borrowed dollars while world nickel prices were plunging and big producers in Canada were shutting down. Similar decisions apparently have been made at other operations throughout Yugoslavia. These practices help explain why Yugoslavia has worked itself into a deep debt position which now threatens to topple the economy.

Writing in The Wall Street Journal (October 12, 1983), Nora Beloff explained how this had happened. “Jollied along by affluent Western banks eager to lend, and by underutilized Western industry eager to sell, Yugoslavia’s ruling elite went on a spending binge, defying the advice of the country’s best economists, who warned that loans on this scale could never be repaid.” According to Beloff, these massive loans were raised by influential local political bosses in Yugoslavia who were keen to install big plants in their own territories. “None had the smallest concept of cost-effectiveness, nor did they consider themselves personally responsible for repayments.” The loans all went for construction of large ventures like steel mills and aluminum smelters, and by the time the plants came on stream there were no funds left for working capital. So Yugoslav enterprises even depend on credit for almost all their operating costs.

Yugoslav news also gives the impression that the work pace has slowed in many industries. A report by Andrew Borowiec in The Washington Times (October 23, 1984) carried the ironic comment that much of a Yugoslav worker’s time is spent discussing productivity. He described the situation in a shipyard employing close to 6,000 workers: “The shipyard has 672 self-management and socio-political units,” Borowiec wrote. “These units hold 11,525 meetings a year for a total of 31,911 hours. In terms of production, . . . it represents one small tanker.”

This management-by-committee slows decision-making as well as production. Borowiec quoted a British businessman he interviewed in a Belgrade hotel: “The whole thing is maddening. These people take six months to make a decision that requires at the most one hour.”

Mises on Guild Socialism

Yugoslavia’s troubles may he a surprise to many who had high hopes for workers’ self-management. It’s no surprise to students of free-market economics. The concept of workers’ self-management is really a variant of “guild socialism” which Ludwig von Mises examined in his classic work, Socialism. One self-deception of guild socialism, Mises explained, was the belief that it could create a socialist order of society which would not en danger the freedom of the individual and would avoid all those evils of centralized socialism which the English detest as Prussianism. But it would he necessary for the state to set the aim of production and what must be done to achieve this aim, Mises noted. This central control was necessary if the system were to work at all. “Society cannot leave it to the workers themselves in individual branches of production to determine the amount and the quality of the la-Dour they perform and how the material means of production thereby involved shall be applied,” Mises said. “If the workers of a guild work less zealously or use the means of production wastefully, this is a matter which concerns not only them but the whole society. The State entrusted with the direction of production cannot therefore refrain from occupying itself with the internal affairs of the guild.”^[6] Mises also doubted that the workers under guild socialism would perform efficiently under their supervisors or would know what to produce and in what amounts.

Workers’ self-management in Yugoslavia seems to be a species of guild socialism, and it is apparently displaying the same contradictions and shortcomings that Mises thought would make this form of socialism unworkable. The central government in Yugoslavia has taken a number of steps to adjust to workers’ self- management, but these actions only delay the solution and deepen the damage. The high double-digit inflation, for example, is the result of frantic efforts to meet impossible demands on the budget. At some point, there must he a breakdown when the currency becomes vir-tually worthless, when lenders will no longer be able to accept Yugoslavian debt, and when worker- alienation almost paralyzes the economy.

When that happens, it’s highly probable that some intellectuals will conclude that workers are too ignorant, too lazy, and too selfish to manage their own operations. The real problem with workers’ self-management is more fundamental to human nature: We all become too ignorant, too lazy, and too selfish to manage operations when we are placed in arrangements that attempt to suspend or bypass the needed constraints of the market. None of us knows what ought to be produced when we don’t have the market as a guide. Few of us work as hard as we can if we don’t have incentives for doing so. And we all usually make decisions with our own interests in mind.

Is There Life After Self-Management?

What’s ahead for Yugoslavia when the current system collapses or becomes unworkable? The two choices that seem obvious are a return to some highly disciplined centralist control or a bold attempt to move toward a free-market economy. The crying need, of course, is for the latter.

One of the lessons of history is that an oppressive central Communist or Fascist government does have political appeal after a system drifts into anarchy and chaos. A strong leader or party promises to restore order and direction which many people crave after a period of turmoil and uncertainty. And for a time, the new system will seem to “work” because it eliminates opposition and stifles dissent. The Communist clique that heads Yugoslavia could impose such control on the country, but with great difficulties in view of trends elsewhere in the Communist world. The central government of Yugoslavia also must consider possible rebellion or resistance from the republics if tight central control is re-established.

A more exciting possibility is that Yugoslavia could eventually adopt essentially capitalist forms to replace the current self-managed enterprises. The barrier to this is Communist and socialist philosophy. But it’s becoming clear that the lack of ownership status is the major defect of workers’ self-management. Djilas has even suggested that workers ought to own shares in their companies. Professor Ljubo Sirc, a Slovenian who now teaches at the University of Glasgow, flatly asserts that what Yugoslavia needs is a market economy. Writing in The Wall Street Journal (August 10, 1983), he expressed grave doubts that any new loans or other ad hoc measures could solve Yugoslavia’s problems without greater freedom for the self-managed enterprises.

There’s also a need to break down the barriers that prevent cooperation among the various Yugoslav republics. But that will tend to happen easily and smoothly when the economic interventions are eliminated. If the railway network in Yugoslavia were under private ownership, for example, it would quickly discontinue the costly practice of switching engines when trains passed from one Yugoslav republic to another. There would be no way to keep inefficient factories in business with the elimination of subsidized borrowing through the government. Each enterprise would find its place in the world markets and survive according to its productivity and efficiency. Yugoslavian managers, now still restricted by the workers’ councils, would have broader authority and accountability under a profit-driven system.

Socialist Myths

What about the dreams of “democracy in the workplace” and Marx’s “free association of producers”? These are socialist myths which have led to foolish experiments and conclusions. We all benefit by being democratic in spirit and we should be free to associate with other producers. But the market will only reward us according to our abilities and it will also set the terms for our production. In a free-market economy, workers’ self- management is always permissible when any group of workers wants to set up or buy a business to run them selves.

As we know from experiences here in the United States, however, worker-owned and operated enterprises have had only limited successes and have not proved either more efficient or more democratic than other businesses. There have recently been a number of employee buyouts of ailing enterprises and obsolete factories, and it’s not surprising many of them continue to fail. Even under the best of conditions, it’s difficult and risky to run a business. It takes expert, alert, and energetic management to keep any business profitable and on the right track. And the frequent turnover of business executives in the U.S. shows that finding good managers is a difficult task even for the most successful enterprises.

Socialism, with its outmoded ideas about class struggle, has always praised the worker and scorned the managerial class. But workers and managers should actually be partners in the production process, not adversaries. There is nothing about being a worker that makes one worthier and more virtuous, and there’s nothing about being a manager that should be discreditable. Both are needed in their proper roles. Many managers, in fact, are workers who later developed good managerial skills.

In its present form, workers’ self-manage-ment in Yugoslavia is bad management, bad business, and even bad politics in the long run. With full property rights in business and a free-market economy, Yugoslavia could become one of Europe’s most prosperous and productive countries. Let’s hope that it works out that way. []

1.   Milovan Djilas, The Imperfect Society (New York: Harcourt, Brace & World, 1969), pp. 219-222.

2.   Its name between 1918 and 1929 was “Kingdom of Serbs, Croats and Slovenes.”

3.   U.S. News & Worm Report. February 6, 1984, p. 37.

4.   Erik G. Furubotn and Svetozar Pejovich, “Property Rights, Economic Decentralization and the Evolution of the Yugoslav Firm,” The Journal of Law and Economics, October, 1973, pp. 275-280.

5.   Michael T. Kaufman, “Decentralized Decision-Making Plagues Yugoslav Economy’,” The New York Times. October 29, 1984.

6.   Ludwig von Mises, Socialism (New Haven: Yale University Press, 1951), p. 261.