Current Issue
Next Issue
Back Issues
Marxist Theory
Socialist History
Left Politics
Left Groups
New Interventions
Islamophobia Watch

What Caused the Yugoslav Economic Disaster?

Chris Gray


Although it is some years now since the disintegration of Yugoslavia, and the "Yugoslav model" is no longer currently in operation, socialists still disagree about the causes of its collapse, and there is no doubt that we need to learn the lessons of the whole unfortunate experience.

Recently David Schweickart has written in glowing terms about the virtues of the "Yugoslav model". For him "the Yugoslav experiment in worker self-management sustained for three decades one of the highest rates of growth in the world, vastly improved the average standard of living, and produced a vibrant intellectual culture" (David Schweickart, After Capitalism, 2002, p.59).

Schweickart quotes with approval the assessment given by Harold Lydall in his book Yugoslavia in Crisis:

"It is evident that the principal cause of failure was the unwillingness of the Yugoslav Party and government to implement a policy of macroeconomic restriction – especially restriction of the money supply – in combination with a microeconomic policy designed to expand opportunities and incentives for enterprise and efficient work. What was needed was more freedom for independent decision-making by genuinely self-managed enterprises [Schweickart’s emphasis] within a free market, combined with tight controls on the supply of domestic currency" (Harold Lydall, Yugoslavia in Crisis, 1989, p.69; see Schweickart, p.61).

David McNally offers a contrasting analysis in Against the Market. McNally is adamant that:

"Workers’ control [he means: workers’ management] is not possible ... in a situation in which groups of workers continue to relate their labour and its products to those of other workers by means of the market. So long as acts of concrete labour are connected only through the market, society’s means of production will obey the competitive imperative to accumulation as an end in itself [he means: a paramount end] and will thus continue to evade the control of the direct producers – which is to say that they will remain a form of capital.

"One can see some of these effects in the case of the Yugoslav economy of the 1960s, 1970s and 1980s. Yugoslavia was that Stalinist state which most seriously tried to co-ordinate elements of workers’ participation in the firm with market regulation. And the results were entirely consistent with the analysis we have presented: inherent tendencies towards unemployment (partially relieved for a time through emigration), inflation, increasing social inequality, and concentration and centralisation of capital. The Yugoslav case demonstrates that market regulation imposes its own imperatives on the firm irrespective of its structure of ownership or the degree of workers’ self-management (which in the Yugoslav case was often exaggerated by commentators)" (David McNally, Against the Market, 1993, p.182, emphasis in original).


The system in its mature form only really operated from around 1976 to 1988, but its origins date from around 1950, when the regime decided to break definitively with the Stalinist command model, which had developed in the USSR and was being applied in Central Europe. Diane Flaherty gives a good summary of the preceding periods:

"The early years, from 1952 (when the administrative Soviet-type model was abandoned) to 1961, were a time of limited decentralisation during which some control over the distribution of enterprise income was shared with enterprises and with governments at the republic and communal (local) level. Industrialisation through import-substitution was adopted as the basis for growth, and its success regarded as dependent upon central control over both domestic production and foreign trade. The second period, the years of reform (1961 to 1976), witnessed a repudiation of the growth strategy and trade policy of the 1950s. The new approach attempted to use market forces to determine the pattern of trade, and relied on export sectors to propel development. Reforms included the transfer of decision-making on investment from the federal budget process to banks and enterprises, the removal of restrictions on prices and incomes, and the liberalisation of foreign trade. Before these reforms, decentralisation had meant merely some enterprise and local control over the disposition of revenues still allocated from the centre, while in the post-reform years most of the national product was allocated by firms and non-federal governments. The third period, beginning in 1976, is distinct in its attempt to combine elements of both earlier periods: import-substitution was again to be the strategy for growth and the rationale for trade, but at the same time decentralisation was extended" (Diane Flaherty, ‘Economic Reform and Foreign Trade in Yugoslavia’, Cambridge Journal of Economics, Vol.6 No.2, 1982, p.105).


In effect, the "Yugoslav model" ended up as a combination of features characteristic of two distinct modes of production, viz. capitalism and socialism, held together by an aspirant ruling class which was still in its soul enamoured of Stalinist commandism: "market forces" indicated capitalism’s influence, while samouprava (Serbocroat for "self-management") looked forward to genuine socialism, but the whole complex was directed by a ruling bureaucracy.

Milovan Djilas, in his books such as Anatomy of a Moral, The New Class and Rise and Fall, describes how Tito took over the former royal palaces and the best hunting preserves for his own use, as well as the royal train (Milovan Djilas, Rise and Fall, 1985, pp.14-16). Lower functionaries followed this example; the best hotels were commandeered for use by federal government agencies and veterans of the partisan war. Special stores, on the model of Stalin’s Russia, were set up for the exclusive use of top party officials and the like; they were unpopular right from the word "go", and after some years Kidrić and Djilas persuaded Tito to do away with them. However:

"Even after the special stores were abolished, members of the Politburo and a lesser number of top officials continued to have privileged sources of supply. They were fed by Tito’s farms and, through his staff, were provided with first-class merchandise at advantageous prices" (Djilas, p.19).

This privileged stratum remained in existence after Tito’s death in 1980. In the words of Harold Lydall:

"In Yugoslavia, as in all communist countries, party officials enjoy many privileges. They are well paid, they are given the best housing (at heavily subsidized rents), and they can look forward to good pensions. As pointed out by a member of the Central Committee of the Yugoslav Party in a discussion at its 21st Session (Ekonomska Politika, 4 November 1985), whilst most young people leaving school have to wait for years for a job, supported by their parents (who are often pensioners), the children of officials ‘have no material problems, nor difficulty in being registered at a preferred university; nor do they have to wait for a job’. Not surprisingly, the percentages of various social groups who are members of the Party are estimated to be as follows (EP, 10 March 1986): managers, 76; experts, 42; teachers, 40; industrial workers, 8; and private peasants, 2-3" (Lydall, pp.214-15).

Ready as the Yugoslav leaders were to strike out on their own after 1948, they were unable to dispense altogether with the notion of "socialism in one country". This conception cut across what had been agreed by the Second and Third Internationals, namely the idea of a Balkan federation. Stalin was initially keen on this, provided he could control it; he was, however, suspicious of any independent moves in this direction, coming down heavily on a plan for a Romanian-Bulgarian customs union in 1948 (see Milovan Djilas, Conversations with Stalin, 1963, p.134). Stalin soon realised that Tito was not going to be subservient, and proceeded to engineer the expulsion of Yugoslavia from the Cominform in June 1948. The Balkan Federation plan was therefore mothballed. It could have been revived in the context of a Hungarian-Yugoslav alliance in 1956, but Tito refused to go down that road. This meant, in effect, the end of any prospect of building socialism in Yugoslavia for the immediate future. Just as in an isolated USSR in 1924, with its pockets of advanced industry operating in the midst of a technologically backward peasant agriculture, the realisation of socialism in a small overwhelmingly peasant country devastated by war was a utopian dream.


There is no doubt that, objectively speaking, the Yugoslav bureaucracy acted as a brake on the development of the country’s productive forces. On paper, workers in enterprises ("Basic Organisations of Associated Labour") were in a position to choose their own directors and manage their own economic units on behalf of society as a whole. In practice, however, appointments were made by the local party. Lydall in Yugoslavia in Crisis described the real situation as follows:

"Yugoslav governments, at all levels, but especially at communal level, exercise final control over all major investment decisions in ‘their’ enterprises. They sanction credits from local banks, despite the fact that the banks are supposed to be controlled by the enterprises. They force local firms to take on additional quotas of workers, irrespective of whether they are needed or not. They choose the directors of local enterprises and banks, ensuring that they are politically reliable, and often give these posts to politicians who are not well qualified to fill them. And they even put pressure on local enterprises to follow a policy of autarky. For example, they block enterprise plans to invest in other communes (or republics); and they try to ensure that, so far as possible, local enterprises buy their supplies from other local enterprises....

"So, in spite of the high claims for the self-management system, the workers were not to be trusted to manage their own affairs. They were to be kept strictly under the control of the local party bureaucracy. The motives for this policy were not, of course, simply ideological. If the workers had been allowed to exercise genuine rights of self-management, tens of thousands of party bureaucrats would have lost their power and their comfortable jobs" (Lydall, pp.78-9).


Unemployment was potentially endemic. As Lydall points out, with an 80 per cent peasant population, most of whom were very poor, any developed modem industry would be a magnet for peasants moving to the towns in search of greater monetary rewards for their labour. The CPY chose to block the growth of small-scale private enterprise. Lydall writes:

"So long as the Party was able to impose very high saving rates on the population, or could draw on ample foreign loans, it was able to create essentially capital-intensive enterprises which, when deliberately overmanned, were able to absorb most of the surplus labour. But when, in the period of the Economic Reform in the second half of the 1960s, enterprises were given greater freedom to work in a market environment, much of this excess labour was squeezed out. Fortunately, it was just at that time that the West European (especially West German) demand for imported labour was growing, and hundreds of thousands of Yugoslavs were allowed to emigrate in search of jobs. But after 1979 the supply of foreign capital dried up, the domestic saving rate began to fall, and the net migration of workers between Yugoslavia and Western Europe began to flow in the opposite direction.

"In these circumstances, and within the limits of the established ideology, there was only one policy left: to keep putting pressure on social sector enterprises (and on the non-productive part of the social sector also) to take on unwanted workers" (Lydall, pp.87-8).

This policy, besides its detrimental effects on productivity in social sector enterprises, was also inflationary.


The Yugoslav government tried its best to promote industry, especially in those fields where it felt that the country possessed a comparative advantage in world markets. This applied particularly to shipbuilding, bauxite production, aluminium processing and metal products. Export performances here were creditable, but unfortunately the industries concerned were not able to acquire much hard currency for Yugoslavia. Ships were sold to Asia and to Eastern Europe; bauxite sales were made in the developed world, but aluminium markets were found predominantly in the USSR and Central Europe, and metal products went largely to the ex-colonies.

Such relative successes were offset by some glaring examples of mismanagement (see Lydall, pp.83-7). Devolution of power to individual republics raised its own problems:

"As a result of autarkic republican planning there has been much duplication of capacity in a wide range of industries. In 1984, for example, total oil refining capacity was 30 million tons, while domestic consumption of oil products was only about half as much. At that time, also, Yugoslavia had 23 sugar mills, but there was not enough production of sugar beet to keep the mills working at even 50 per cent of their capacity. For similar reasons, slaughter-houses and meat processing firms were also operating at less than half capacity...." (Lydall, p.86).

Decentralisation measures had a notable adverse effect in the transport sphere. Lydall writes of the railway system as follows:

"The Yugoslav railways are divided into eight ‘completely separate organizations’. Until recently these were further divided into 365 basic organizations, each of which, according to the Law on Associated Labour, had the right to select its own managers, irrespective of the views of the managers of the larger organisations. Moreover, each basic organization had the right to make its own disciplinary decisions, without regard to any damage caused by bad work to the railway system as a whole. With great difficulty, the number of basic organizations in the railways has now been reduced to between 40 and 50. But this still leaves many occasions for conflicts of interest. For example, trains run late; and one reason for this is that each basic organization keeps control over its own rolling stock, which is often returned empty. There are seven or eight different types of locomotive, and some variations also in the passenger coaches. This imposes the need to maintain a large stock of spare parts and tools. Repairs are done four or five times, and during all this time the rolling stock is out of action.... Locomotives, trains, and crews stand idle, waiting for work for their own basic organization, and every day hundreds of wagons clatter empty around the country" (Lydall, p.110).


A serious balance of payments problem arose, as the figures in Table 1 show.

Table 1
Balance of Payments Deficit ($million) 1956-1980

(Source: Diane Flaherty, ‘Economic Reform and Foreign Trade in Yugoslavia’,
Cambridge Journal of Economics, Vol.6 No.2, 1982, pp.126-7.)

Lydall in his book specifies three ways of rectifying such a deficit:

1. reduction of imports, and reduction of internal demand in order to encourage exports;
2. import controls;
3. devaluation, in order to lower export prices.

Of these, the last is preferable, but "the difficulty with a policy of exchange depreciation is that, unless it is accompanied by a strict control over the money supply, it will sooner or later lead to an inflation of domestic costs and prices" (Lydall, p.54).

In theory, "if a country’s currency is made scarce, its citizens will strive to replenish their own supplies of that currency by more or better work, by more production, by more careful expenditure decisions, and by more sales, both at home and abroad.... Unfortunately, however, most governments, especially ‘socialist’ governments, hate to adopt a tight monetary policy, because one of the great perquisites of government is the right to borrow from the central bank at low cost (or to print money) in order to spend money on projects that satisfy its aspirations or the desires of its supporters. This reluctance is even greater in a country like Yugoslavia, where the government party believes that it has both the right and the duty to direct the economy in detail according to its own economic and political preconceptions" (Lydall, pp.54-5).

This reluctance was the regime’s undoing: despite repeated devaluations of the dinar inflation was allowed to spiral out of control.

Table 2
Changes in Cost of Living and Money Supply 1977-1987
Increase in money supply (a) as % of
Change in cost of living (b) (%) Money stock at beginning of year Consolidated government expenditure Adjusted social product
1977 15.2 21.6 14.3 6.6
1978 14.5 25.6 16.5 7.5
1979 21.1 19.0 12.7 5.6
1980 29.6 23.1 14.5 6.3
1981 41.9 26.6 15.6 6.2
1982 29.2 26.6 15.9 6.0
1983 41.2 20.1 11.3 4.2
1984 54.5 43.1 19.5 7.2
1985 71.5 46.5 17.1 6.4
1986 89.0 109.1 27.2 11.6
1987 120.0 92.5 23.0 9.3

(a) Change in money stock from end December of previous year to end December of given year.
(b) Change from average of previous year to average of given year.

(Source: Harold Lydall, Yugoslavia in Crisis, 1989, p.163.)

A few words about the role of the IMF, which Yugoslavia was forced to apply to for loans, are in order here. Michael Barratt Brown is quite right to criticise this body for its global approach to economic problems in the ex-colonies, some of whose effects have been disastrous. The fact that it was the IMF which finally killed off samouprava by insisting on the repeal of the relevant legislation in October 1987 shows how ideologically blinkered it was, The IMF should, indeed, have been allowed to underwrite the final ill-fated Marković government in 1991, as Barratt Brown states (From Tito to Milošević, 2005, p.137), but given its subservience to US imperialism (which by this stage was unwilling to be as accommodating to Yugoslavia as it had been in the period of the Cold War) it followed its master’s voice in this regard. All of which goes to show that it is advisable for countries to keep out of the clutches of the IMF as far as humanly possible.


Not surprisingly, the economic catastrophe held dire consequences for the regime’s social aspirations. First of all, any prospect of redressing the balance between the more developed and less developed parts of the country rapidly receded.

Table 3
Regional Differences in Productivity and Income 1986
(indexes: Yugoslavia=100)
Resident population (000) Real social product per head Output per worker in social sector Net personal income per worker in social sector
Nominal Real
Slovenia 1871 179 145 145 124
Croatia 4437 117 106 108 102
Vojvodina 1977 133 103 92 101
Bosnia and H. 4155 80 85 87 96
Serbia 5574 94 93 93 93
Montenegro 604 80 90 81 84
Kosovo 1760 36 69 73 89
Macedonia 1954 75 75 70 80
YUGOSLAVIA 22334 100 100 100 100

(Source: Harold Lydall, Yugoslavia in Crisis, 1989, p.188.)

Table 3 shows the relative positions of the constituent republics and provinces in 1986. Considerable transfers of funds to the poorer regions were made, but the desired equalisation was not achieved. Lydall wrote that there was:

"... no evidence that the relative position of the less developed regions has improved. A comparison of social product per head in the 1950s with that in 1986 (in current dinars, unadjusted for regional differences in the cost of living) shows a significant improvement for Montenegro (from less than 60 per cent of the average to 77 per cent) and, at the other end of the scale, for Vojvodina (from less than the Yugoslav average to 21 per cent above it). The main losers in this period were Bosnia and Herzegovina and Kosovo, while the relative positions of the other regions (Slovenia, Croatia, Serbia and Macedonia) did not change significantly. But most of the changes that did occur took place over 1950-70; since the latter year there appears to have been little impact on the relative positions of the different republics and provinces in social product per head" (Lydall, p.193, emphasis in original).

It is worth noting that, as Branka Magaš records, in 1987 Macedonia, Kosovo and Montenegro declared themselves bankrupt (Branka Magaš, The Destruction of Yugoslavia, 1993, p.117).

Secondly, there was a sizeable deterioration in the position of the working class. According to Lydall, real personal incomes of social sector workers fell by around 25 per cent. There was a deterioration also in the "social wage":

"The standard of education, health, and housing services has also fallen. Universities are unable to replace essential equipment or to buy foreign journals; hospitals and patients are short of drugs; and, despite a heavy backlog of demand, completions of new social sector flats have fallen. Real earnings of teachers in schools and universities have been reduced even more than in most other occupations" (Lydall, pp.4-5).

Faced with these adverse circumstances, Yugoslav workers responded with a magnificent display of militancy. In the first nine months of 1987 there were more than a thousand strikes involving about 150,000 workers, according to one report – an underestimate, says Lydall, as some Macedonian strikes were not officially reported (Lydall, p.120). The strikes continued until 1988. The demands were not addressed to the workers’ councils, but to the republican governments and their agents (including the official trade unions). The most celebrated struggle was waged by coal-miners at Labin in Istria (see Lydall, p.121; also Magaš, pp.105-7). As we have seen, the rate of inflation at this point was 120 per cent.


The great tragedy at this point was the failure of the socialist left, both inside Yugoslavia and outside, to give the workers’ movement a lead in the form of a programme which would have gone some way to solving the political and economic crisis. Here the malign influence of the one-party system introduced immediately following the Second World War made itself felt. As Michael Barratt Brown has emphasised, the fact that a nation-wide opposition could not function meant that the form taken by actual opposition movements was "nationalist", that is to say individual republican and provincial bureaucracies tried to use the system for their own ends to the detriment of other republics and provinces (Barratt Brown, p.92).

It was clear even before the eruption of the hostilities of the 1990s that it was in the working class interest to maintain the unity of the country. Duncan Blackie made this point explicitly in 1991, when he declared that: "Genuine socialists in Yugoslavia will have to do as the Bolsheviks did in the Tsarist empire – stand against all attempts to push nations around, but insist that only an independent workers’ movement is capable of such a solution" (Duncan Blackie, ‘The Road to Hell’, International Socialism No.53 (new series), 1991, p.54).

Unfortunately, he did not go on to indicate what the policy of such a movement should have been on the economic front.

Inside the country a great responsibility rested on the oppositionists in the republic which was ostensibly the most advanced – Slovenia. Branka Magaš wrote that:

"The Slovene Left ... became increasingly aware of the fact that, even though the Slovene party had been an important factor in the democratization of public life in Slovenia, it was unable or unwilling to formulate an all-Yugoslav democratic platform that would be acceptable to non-Slovenes. Without such a platform, it is impossible to defeat the growing bureaucratic counterrevolution; the latter’s defeat, on the other hand, would open the way for a radical democratic transformation of the moribund political structures, as an indispensable condition for solving the economic and social crisis" (Magaš, p.146).

It is important not to underestimate the obstacles facing such a project. As Harold Lydall writes:

"When there is no freedom of information and organization, with government having control over all organs of opinion, the people are kept ignorant, divided, and intimidated. In such a society it is very difficult for anyone to formulate an alternative political programme, and virtually impossible, except in a severe crisis. to win popular support for it" (Lydall, p.213).

But there was a severe crisis. Branka Magaš herself provided elements of a programme in The Destruction of Yugoslavia, but insisted on the paramount need for the "democratization" of the Yugoslav League of Communists, to be undertaken, if possible, by "the increasingly self-confident and self-organized working class" (see Magaš, pp.118-19). Here Poland and Solidarność provided a model, but the key element in the Yugoslav situation was precisely the absence of any all-Yugoslav opposition movement or trade union of the Solidarność type. No agency, therefore, was available which could force through appropriate action, such as measures to "take out of the reach of the bureaucracies of the underdeveloped regions the right to direct all-Yugoslav support to their own self-preservation" (Magaš p.136).

Instead, the republican bureaucracies were able to keep the populace in subjection by each playing the nationalist card in their own area; the logical outcome was the dismemberment of the country, including above all the dismemberment of Bosnia, where the various nationalities were so mixed that it could not survive as a separate republic within its historic boundaries without the backing of an all-Yugoslav federation.

In retrospect we can say that the left could not have come up with a fully worked out programme for Yugoslavia at this point, in the absence of a comprehensive critique of the policy of the existing regime, particularly as regards political economy.


Attentive readers will have noticed that both David Schweickart (basing himself on Lydall) and David McNally were correct in outline in their assessments. Ironically, Schweickart’s proposals outlined in After Capitalism themselves partly derive from the work of the Yugoslav economist J. Vanek. The Schweickart model, though not without its own problems, manages to avoid the vast majority of pitfalls in the Yugoslav set-up as it ran from 1950 to 1990. If it had been put forward around 1987 it might have formed the basis of a programme for the democratisation of Yugoslavia as a whole and for the country’s continued existence until the emergence of a Balkan Socialist Federation. Such a turn of events was obviously not possible at the time. Even so, in order to get what we want we have to be crystal clear about what we don’t want, and about how to avoid it.


Michael Barratt Brown, From Tito to Milošević (Merlin Press, 2005).

Duncan Blackie, ‘The Road to Hell’, International Socialism No.53 (new series), 1991.

Milovan Djilas, The New Class (Thames and Hudson, 1957); Anatomy of a Moral: The Political Essays of Milovan Djilas (Frederick A. Praeger, 1959); Conversations with Stalin (Rupert Hart-Davis, 1962; Penguin, 1963); Rise and Fall (Macmillan, 1985).

Diane Flaherty, ‘Economic Reform and Foreign Trade in Yugoslavia’, Cambridge Journal of Economics, Vol.6 No.2, 1982; ‘Self-Management and the Future of Socialism: Lessons from Yugoslavia’, Science and Society, Vol.56 No.1, 1992.

Mike Haynes, ‘Nightmares of the Market’, International Socialism No.41 (new series), 1988.

Harold Lydall, Yugoslavia in Crisis (Clarendon Press, 1989).

Branka Magaš, The Destruction of Yugoslavia: Tracking the Break-up 1980-92 (Verso, 1993).

David McNally, Against the Market: Political Economy, Market Socialism and the Marxist Critique (Verso, 1993).

Catherine Samary, Plan, Market and Democracy (International Institute for Research, 1988).

David Schweickart, After Capitalism (Rowman and Littlefield, 2002).

Susan Woodward, Balkan Tragedy (Brookings Institution, 1995).