Economic Incentives In Yugoslavia

Economic Incentives In Yugoslavia

Yugoslavia is a nation of 20 million people inhabiting an area about the size of Wyoming. It is a federation of republics, consisting of Slovenia and Croatia in the north and Bosnia-Herzegovina, Serbia, Montenegro, and Macedonia in the south. These diverse areas were bound together as part of the political realignments following World War I. Regional animosities have continued in recent years and now represent a threat to continued eco­nomic and political progress. Yugoslavia is a poor country whose popula­tion is predominantly agricultural. There exist, nevertheless, wide discrep­ancies in living standards and industrial development between the relatively prosperous republics of Croatia and Slovenia and the rest of the nation.

Yugoslavia is an interesting case study. First, it has the only com­munist political system in Europe that is and has been completely inde­pendent of the Soviet Union; the satellite nations have been subservient to Moscow. Since 1950 Yugoslavia has deliberately departed from the political and economic institutions of the Soviet model. A kind of demo­cratic and decentralized communist system has developed, in which workers formally share in the management of the socialized industry and peasants own and till their own land with the assistance of agricultural cooperatives.

The present government grew out of internal guerrilla resistance to the German invasion in 1941. With the end of the war, political unification and economic recovery became major goals.

In a country as diverse as Yugoslavia, "building of socialism" must have posed difficult problems and choices. There was a problem of priority: Which parts of the country should be developed first? Slovenia and Croatia, because of existing infrastructure and manufacturing tradition, offered a less expensive road to progress. But one of the main goals of the other republics was to catch up with Slovenia and Croatia, and it would have been politically inopportune to frustrate their desires. Then there was the problem of financing: Which of the social strata were to bear the costs of development? Taking into consideration that the great majority of the population and a sizable portion of the partisan army were peasants, the decision was not an easy one to make.

Yugoslavia first embarked on a development scheme closely parallel­ing the Russian example, complete with a Five Year Plan and an attempt to collectivize the agricultural sector. A combination of unrealistic plan­ning, the withdrawal of Soviet aid and export markets, and harvest failures in agriculture due to droughts and disruption produced an economic crisis in the early 1950s. This situation resulted in the creation of the present Yugoslav incentive system, called "Our Own Road to Socialism."

Economic Planning in Yugoslavia

With Yugoslavia's severance of political ties with fellow communist coun­tries, the second period of the First Plan (1953-1956) was marked by a reconsideration of the plan model. More emphasis was put on agriculture and light industry instead of on heavy industry. The introduction of work­ers' self-management and the decentralization of governmental and eco­nomic functions provided powerful incentives for economic revival. Em­phasis was shifted from comprehensive planning to regionally and func­tionally decentralized plans. The general federal plan was confined to the basic proportions for economic development. The five basic proportions set up were:

1. Proportions between different sectors of the economy—industry, agriculture, and services.
2. Proportion between saving and consumption, ensuring an accelerated rate of capital accumulation.
3. Proportions of basic wages among sectors.
4. Proportions of contributions to the Social Fund from individual taxation, profits of productive enterprises, and so on.
5. Proportion of administrative expenditures for such traditional items as defense, law and order, and so on.

The year 1953 also brought a change in the system of financing capital-investment projects. Previously these had been supported almost entirely by outright grants from the national government's budget; now investment comes from repayable loans from the Federal Bank or the rein­vestment by enterprises of their own earnings. For a time in the mid-1950s, loans were granted through a system of competitive auctions—an institu­tional form that caught the attention of Western observers because of its ability, in theory at least, to achieve efficiency in allocating scarce capital within a socialist economy. The investment auction was replaced by admin­istrative rationing of loans for centrally favored projects (those promoting tourism or regional balance, for instance). The rapid turnover among plant managers encouraged bidding to finance short-term, high-risk projects under the investment-auction system.

Also in 1953, the agricultural collectivization program was aban­doned. Collectivization failed because of the slow rate of mechanization, the lack of agricultural technicians, and the weak incentives on the part of collective-farm members. Many collectives were dissolved by majority vote of their members, and the land reverted to private operation by indepen­dent peasant households. The government's primary agricultural institution, the General Cooperative, provides access to cheaper fertilizer and agricul­tural equipment, and to government credit and extension services. Through voluntary membership in cooperatives, the government hopes to achieve some of the advantages of large-scale collective farming within a system of small, private landholdings.

The problem of agriculture remains essentially unsolved. The story of the collapse of the collective-farm movement merits scrutiny. Although the Soviet collective-farm pattern of organization was followed superfi­cially, there were no attempts to mechanize farms rapidly as in Russia, no counterparts of the Soviet Machine Tractor Stations, and no large-scale governmental investment in agriculture. The result was failure to raise agri­cultural productivity. Of course Yugoslavia is handicapped in these matters by the fact that two-thirds of its terrain is too mountainous to be suitable for large-scale farming. Moreover, the hold of private, small-scale farming on the ideology of the peasant has been firm, and his at least tacit support is needed by the Communist League in a country where the agricultural peasantry embraces about half the population. To make the peasant production minded beyond the limits of supplying food for his own family and feed for his livestock, and to introduce mechanized production methods are the big problems. The small size of the private holding is an enormous handicap to mechanization. However, a start is being made through coop­eratives supplying their machinery to prepare soil, sow it with high-yielding varieties of seed, and harvest the crop on land belonging to peasant families under contractual arrangements providing for the division of products be­tween the cooperative and the private peasant.

Workers' Councils

Karl Marx had a vision of a better life for the proletariat after the predicted overthrow of capitalism occurred. The vision did not extend, however, to a situation in which the workers themselves would make the actual man­agement decisions. Yet that is the legal status of the Workers' Councils— employees participate in deciding on the use of an enterprise's resources, on how much of its earnings to invest and how much to use in raising wages, and on which managers should be hired to implement these deci­sions. Western observers have differing opinions about the extent to which the central-planning apparatus erodes the de facto powers of workers' councils, but all-agree that worker participation is a novel means of pro­moting effort in a market-oriented economy.
The workers' council is the supreme body of management in an enter­prise. At its meetings it decides basic policy matters for the enterprise. The members of the council are elected to one-year terms by the workers in the particular enterprise. Candidates for membership are nominated by the local trade union or by any group of workers comprising at least one-tenth of the total number of employees. The usual workers' council consists of between 15 and 20 members, depending on the size and organization of the enterprise. The members are elected by secret ballot. The council works as a body and adopts all of its decisions at its meetings, which are held at least once every six weeks. Decisions are made by majority vote of the members present. Meetings are attended by the director of the enter­prise and by the members of the managing board, the executive committee of a workers' council.

The managing board directly manages the enterprise in accordance with the policy decisions and directives of the workers' council and in keep­ing with laws and rules enacted by the national government. The board consists of between three and eleven members, including, ex officio, the director of the enterprise. The board is elected by secret ballot at the first meeting of the workers' council for a one-year term. In order to secure proper composition of the board and prevent bureaucratic tendencies therein, at least three-quarters of its members must be workers engaged directly in the process of production. The members of the workers' council and the managing board receive no remuneration for membership in these bodies aside from their regular wages, which are paid while they perform the duties entailed by their office. During their terms they continue to work at their regular jobs in the enterprise.

The director, responsible for the day-to-day operating management of a given enterprise, is chosen from openly competing candidates drawn from outside the enterprise, the final choice being made by a joint commis­sion composed of representatives of the workers' council and representa­tives of pertinent professional associations nominated by the commune (local government) of the area where the enterprise is located. The director organizes the process of production in the enterprise and directs operations in accordance with the policies and decisions of the workers' council and the managing board. He represents the enterprise in negotiations and con­tractual relationships with other enterprises. Ordinarily the council and the director stay out of each other's domain, although there are close ad­visory and consultative relations between them. If an irreconcilable dispute were to arise, causing the council to wish to get a new director, the matter would be finally resolved by the local commune or, in the case of a very large enterprise, by a higher governmental body.

With regard to purchasing raw materials and equipment, enterprises are free to enter into contracts with each other. The markets for most fin­ished commodities have been free and open, and each enterprise decides what quantity of a particular commodity to produce and what price to charge for it according to supply and demand conditions. Central planning of output and price occurs for public services such as transportation, com­munication, and other utilities, and for new enterprises in certain basic in­dustries. Overall targets for the various industries are usually set in general planning. But these are strictly advisory, designed primarily to give the individual enterprise an idea of what may occur in the economy as a whole during the year, just as a firm in an American industry may look to the President's Economic Report for some guidance in policy making. The gen­eral economic plan does not determine the obligations of the enterprises by administrative fiat. They carry on their business according to their eco­nomic interests, while general economic regulations (on credit, on the dis­tribution of an enterprise's net earnings, and so on) are designed to induce the enterprise to conduct business according to the course set and the pro­visions of the general economic plan.

In general, it can be said that centralized planning of the economy as a whole has been curtailed since 1953. Most raw-material prices, for­merly controlled by the state, have been decontrolled. Capital accumula­tion has also been freed from central control to a certain extent. After an enterprise has met its costs for materials, wages and managerial salaries, taxes and depreciation, and other costs, the workers' council decides how to dispose of the surplus, if any. Under outside limits imposed by govern­ment regulations, they decide what portion of the net earnings of the enter­prise will be distributed in bonuses to workers and how much will be used for capital expansion. The established enterprises get perhaps as much as half of their new capital needs by reinvesting their own earnings.

In the matter of wage setting, the workers' council again plays an important role. Preliminary scales of wages for particular jobs are drawn up by the management board of the enterprise. If the workers' council, the pertinent commune officials, and the local trade union all agree to these proposed scales, they are put into effect. If agreement among these bodies is not reached, however, the whole case is referred to an arbitration com­mission and thus leaves the domain of the workers' council. The arbitration commission includes representatives of the commune and the trade union. A representative of the government of the republic acts as chairman of the commission and has the deciding vote if the other two groups do not agree. In practice, however, the proposals of the management board are usually agreed to by all concerned.

It is evident that the Yugoslav regime has tried to organize industrial production in such a way as to induce the worker to perform efficiently and contribute his creative energies to his job rather than sabotaging his enterprise through absenteeism and unconcern. It seems to be in his own best interest that his enterprise should sharpen its efficiency in order that it may realize as large a net earning as possible, for only in this way can his own wage and his bonus from net earnings be maximized. However, the degree to which so-called economic democracy has been attained is very difficult to assess. The triple controls—(1) the party—the Communist League members in key positions; (2) the state, with its powers to make and revise laws pertaining to the economy; (3) the general plan—the over­all blueprint with clear indications of targets and indirect regulatory provi­sions (as on credit)—are real and doubtless quite effective. Any sort of democratic planning faces the query as to how decentralization and plan­ning can effectively go hand in hand. If it is planning, it involves some degree of regimentation and centralization of power. The Yugoslavs face the hard task of demonstrating that "economic democracy" can ensure planned development where means of production, at least in the industrial sector, are completely nationalized.

Notwithstanding the rapid progress of workers' self-management, it has some well-publicized deficiencies. The level of efficiency at which its organizational parts function leaves much to be desired. There are consid­erable differences in degree of success in various sectors of the economy; for example, the construction industry has been a conspicuous laggard in this respect. In recent years the government has complained of a tendency of workers' councils to participate in monopolistic price setting in some products. Since the individual enterprise sets its own prices, an enterprise finding itself without competition in supplying a particular market area may be able to charge a higher price than it could if there were a modicum of competition. Enterprises have been known to join in group price-stabilizing arrangements or understandings. At one time punishment was actually meted out to several enterprises believed to have been guilty of such offenses. Yugoslavia thus became the first communist country to take anti­trust action.

A Workers' Council Meeting

To give the student an opportunity to gain something of the flavor of an actual workers' council meeting, the following is an account of a regular meeting of the workers' council of an enterprise in Belgrade with some 700 employees that manufactures tar paper, insulation materials, and cork products.2

All nineteen members of the Workers' Council, which included two women, attended the meeting. The six members of the Managing Board were present, as well as the Director of the enterprise and the Chief Engineer, who took active part in the dicussions but not in the actual decision-making. The session was well conducted, the soft-spoken President using a minimum of parliamentary procedure to keep the meet­ing in order and focused on the agenda. About one-half of the members participated frequently in the dicussion of the various items of business, while most of the others spoke only occasionally. The Sec­retary took minutes of all that was said and decided. Although each of the members appeared to be most articulate on matters relevant to the department from which he had been elected, it was quite clear that many of them were acutely aware that the interrelationship of departments was vitally connected with the success of the whole enterprise, and discussed detailed matters against such a background. The President gave no indication of trying to force his views on the group, although he let them be known. No formal vote was taken on any issue. When those wishing to discuss a matter had finished, the President would state what appeared to him to be the consensus and ask whether there was any disagreement with his conclusion. In no case was any ex­pressed and in this way each issue was resolved, although some matters were held over for further study or consultation with plant workers involved, according to the procedure outlined by the President in his summation of the issue. The Director of the enterprise spoke, some­times at length, on each matter on the agenda. He seemed to be an able, forceful man with qualities of leadership. The positions he took on the several issues, and the recommendations he made, were not quietly accepted by the members. Numerous questions were raised about statements he made, and he was pressed for more details in defense of his positions. It appeared that the members respected the Director but had no compunction about differing with him. The Chief Engineer spoke at length on the engineering aspects of several matters dis­cussed. The members seemed to have less confidence in him than in the Director and, in at least one instance, the consensus of the meeting ran counter to his position. On this, after the discussion, the Director sided with the Council members and appeared quite critical of the Engineer's failure to perform satisfactorily certain functions relative to the revision of piecework production norms.

If the full notes of the business of the meeting were reproduced here, they would indicate that the Workers' Council was performing those functions described earlier.... A brief summary of the items discussed and decided upon will show that the Council was dealing with fundamental management problems. The same had been true of the previous meeting, judging by the minutes which were read.
The first item taken up was the report of the Director on the fulfill­ment of the [enterprise's] plan for the first nine months of 1957. Each member had before him a typed copy of this report. The Director dis­cussed individual items at length and answered numerous questions. The Director's report was broken down by departments, and through the members' questions and comments it became clear that the pre­vailing sentiment was that one of the departments was not operating efficiently. The Director went on the defensive, speaking at length about unavoidable handicaps under which that department had worked. One was a cutthroat competitive situation in which each of the three competitors selling the commodity produced by this department had had its price forced below cost. The Director reported that this situation finally had been stabilized by a price agreement among the three enterprises, an act which a government official later told the writer was absolutely illegal. The Director also pointed out that the distribution of certain plant overhead among the several departments was a quite arbitrary procedure and that, if some other equally logical method of distribution had been used, the financial results in the department under discussion would have been quite different. The Chief Engineer entered the discussion, also in defense of the department under attack, although he was forced to concede that the incentive-rate production norms in this department were obsolete and that this affected per­formance. He was asked pointed questions as to why the situation on norms had not been rectified. It was entirely apparent that the members generally were not satisfied with the Director's or the Chief Engineer's explanations and, as one member put it, were convinced that "the work in this department is not properly organized." The discussion ended with the Director issuing orders to the Chief Engineer to gather the needed data personally and revise the norms. The matter was placed on the agenda of the next meeting and the members agreed to make individual investigations of conditions in the department.

The Chief Engineer submitted detailed recommendations for the re­construction and rehabilitation of numerous pieces of plant equipment. The members asked many questions about his proposals, one inquiring whether the proposals were merely the Chief Engineer's ideas or were officially being placed before the Workers' Council by the Managing Board and the Director. The Chief Engineer answered that the pro­posals were merely offered for discussion and that they were not in final form for official submission to the Council. The proposals were approved "in principle" and the Council asked for more specific data on the self-disposal funds available for capital improvement, and for more time to consider some of the numerous alternative suggestions made by members in the course of the discussion. It was the Presidents suggestion that each member prepare himself to decide upon "the whole plan of reconstruction" at the next meeting.

After brief discussion it was decided to supply certain workers with special work clothes at the enterprise's expense. The Council discussed the proper wage rates for two new employees who had been added to the staff of the employees' kitchen. This discussion ended with the Council, upon the fervent plea of one of the women members, setting the wage rates in question at a higher level than that recommended by the Director. The Council received a written complaint from a worker to the effect that, after he returned from an absence due to an industrial injury, he had been downgraded to a common laborer. There was active discussion of this case, the consensus being that the complainant, a relatively new employee, was not industrious, had come to this plant with the injury he alleged was responsible for his absence, and had been absent frequently without notice and without adequate subsequent explanation. There was considerable sentiment for discharging him, but it was noted that this would be illegal since a sick leave was involved. Finally, the matter was disposed of by a decision that the com­plainant could retain the job to which he was objecting but had no legitimate claim to his former job.

All of the matters discussed at this meeting were such as would be decided unilaterally by representatives of private owners in a capitalist economy, or would be bargained out with representatives of a union. In the Soviet economy they would have been decided by the plant manager or a superior agency of control.

An Evaluation of the Yugoslav Incentive System

To understand workers' self-management in industry, one must understand how the financial affairs of an industrial enterprise are managed. From the total receipts derived from the sale of its product, the current costs of op­erations must come first: outlays for materials, power, and so on; deprecia­tion charges on physical equipment and plant buildings; an interest charge paid to the national government as the legal owner of the production facili­ties used by the enterprise; and the regular wages and salaries to the direc­tor and his staff. What is left after these deductions is then distributed as follows: The federal government levies a substantial profits tax on net earn­ings, and the commune where the enterprise is located has a legal claim to a portion. What remains is at the disposal of the workers' council, which, within certain legal restrictions, divides it among the following uses: rein­vestment in the physical facilities of the enterprise to supplement grants or loans it may get from the government; expenditure on a variety of projects to benefit employees, such as construction of housing facilities; and bonuses to production workers, supervisors, and the director and his staff. Although manufacturing enterprises feature piece-rate and incentive-wage schemes, this last portion of distributed earnings is expected to stimulate the workers of an enterprise not only to perform their own jobs efficiently but, espe­cially, to take avid interest in increasing efficiency everywhere in the enter­prise.

It is extremely difficult to keep track of changes in discretionary con­trol over funds at the enterprise level. Yet the portion left available to the firm and the freedom to allocate these funds between reinvestment and immediate wage supplements and fringe benefits is the key to evaluating the degree of autonomy vested in the institution of workers' councils. Within the limitations on available data, it is possible to distinguish three distinct periods.

During the first period, extending from the creation of workers' coun­cils until 1961, the federal government's goals of achieving a high level of investment, of reallocating funds toward the poorer republics, and of allow­ing local governments the resources to start new enterprises meant that already-established firms faced a heavy burden—up to 80 percent of gross profits—in various forms of taxes and levies. Furthermore, the latitude granted to use the remaining share for bonuses was subject to government regulation. All in all, it seems that cooperative self-management was never granted the full measure of flexibility and autonomy that a reading of the 1950 Law on the Management of Economic Organizations by Working Collectives would indicate.

Beginning in 1961 it became evident that the Yugoslav economy was entering a period of extremely serious strain; the rapid industrialization of the 1950s gave way to what the British call "stag-flation"—a combination of stagnation in real output combined with inflation in money wages and product prices. The government responded with an attempt to stimulate enterprises by reducing the heavy taxes previously owed to local commune governments.
It appears that this change more than doubled the percentage of enterprises' net earnings at the discretion of workers' councils—some esti­mates are that it rose from 20 percent to cs much as 55 percent. Promptly, workers' councils materially expanded their appropriations. Although in­creased appropriations to new equipment and renovation of old were of course directed to "investment purposes," they increased the pressure ex­erted by industrial expansion on the nation's productive resources. It is also reported that in allocating these newly acquired free funds workers' coun­cils tended particularly to expand allocations for consumer goods such as sports stadiums and other recreational facilities, for enterprise-owned work­ers' housing, and for increased bonuses—the last, of course, going almost entirely to expand consumer demand. No explanation has been offered for proceeding so drastically to enlarge the funds at the disposal of workers' councils. The result, which should have been foreseen but apparently was not, was a rapid increase in aggregate monetary demand, with consequent further pressure on productive resources, serious imbalance in the rise of imports over exports, and jeopardy to the very bases of the Yugoslav eco­nomic experiment in self-government of industry.

The seriousness of this situation was quickly sensed by party and gov­ernment leaders. Two sets of centralized compulsory controls were insti­tuted. One was a decreed rollback of prices and wages (including bonuses) and an immediate increase in consumption taxation to take the momentum out of the inflationary forces at play. Private-profit endeavors, which stood to gain immeasurably from inflation, were prohibited by government decree. The other set of controls concerned matters of a still more basic nature. The workers' councils were placed under very strict centralized regulations governing the allocations of the net earnings of each enterprise: requiring increases in appropriations to amortization, working capital, and reserves; restricting increases in bonuses to cases of higher labor productiv­ity, plant by plant; restricting government investment loans to enterprises; and channeling into the national government's possession earnings available for reinvestment in the enterprise accumulating them (such funds to be al­located back to an enterprise only if its investment plans for use of those funds corresponded with the national plan). Some important prices that had previously been left to the play of market forces were fixed by central au­thority. Both the immediate and the more basic controls imposed for those purposes in 1962 tended to be much more centralized in their administra­tion than earlier doctrine or practice in Yugoslavia had provided for.

In 1965 Yugoslavia introduced a third basic set of economic reforms designed to stabilize its overextended inflationary condition. The dominant themes of the reforms were an emphasis on decentralization of economic controls from the federal government to the republics and increased ex­posure of industrial enterprises to competitive market forces to increase efficiency and thereby drastically cut production costs. Although Yugoslav employees would theoretically benefit most if their firms maximized returns per worker, it appears that many enterprises had been harboring excess workers under the previously existing incentive system.

Under the 1965 reform, investment criteria were shifted from a polit­ical emphasis toward much greater reliance on economic indicators of po­tential worthiness. Individual firms thus had to be more responsible for ensuring that capital would be available for their own investment needs, either from retained earnings or from bank loans, which could be secured only if the firm were operating efficiently enough to repay the loan. The im­mediate effect seems to have been an effort to reduce payrolls significantly.4 The Yugoslav experiment in worker self-management can succeed only if a very delicate balance is maintained between the workers' council and hired managers within the firm. Evidence points to moderate success on this front: Managers have not dominated enterprises by retaining vital information or by browbeating members, as had been feared. Managers must use tact and persuasion; the frequency with which they are fired testi­fies to the existence of real power in workers' councils. At the same time, there appears to be little enthusiasm generated among workers for direct involvement in the planning process at the firm level. "Several recent opin­ion polls have pointed to a mood of bitter and resentful apprehension among the workers."5 The low level of productivity in Yugoslav industry is indirect evidence that morale and incentive problems still exist 20 years after the initial formation of workers' councils.

The delicate balance extends to relations between the individual firm and the central economic planning bureaucracy. Economic decision making has been alternately centralized and decentralized, tightened and relaxed, adjusted and readjusted since 1953. Whatever the policy at any given moment, the problems of low productivity, periods of slow growth, rapid inflation, and balance-of-payments deficits appear to become ever more severe. The correspondence between this list of difficulties and those facing England (or, for that matter, the United States) is striking. So is the list of attempted solutions—devaluation of the dinar, credit controls, measures to curb consumption. "There are growing doubts whether the whole idea of a 'self-managing' economy, with firms controlled by workers, can really work after all, without Latin American style inflation."6 Unless some means is found of prodding workers' councils to make fundamental adjustments in output and productivity instead of responding with price and wage increases based on monopoly influence, it seems likely that another swing toward centralized planning is in store for Yugoslavia. Even though workers' coun­cils will probably be retained as the institutional basis for the organization of industrial enterprises, further controls to discourage wage-price inflation seem necessary.

The question that no Yugoslav expert can answer with complete certainty is: how much of the undoubted and spectacular improvement in Yugoslavia's economic performance in the late 1950s and throughout the 1960s was the direct result of workers' enthusiasm and co-operation within the self-management system and how much was due to other factors, especially huge western aid, the removal of the worst managers and the lessening of direct bureaucratic interference? Whatever the conclusion, and the Yugoslavs admit that a complete proof one way or the other is impossible, one thing is clear: workers' self-management cannot be pronounced an economic failure, as its many critics in communist countries shrilly insist. The best that can be said is that it has quite a few uses, from the workers' and managers' point of view, and that certainly from the workers' angle it is preferable to a centralized system of state management. But the workers are certainly in no mood to see all-powerful state bureaucrats replaced by all-powerful manager-technocrats.