Yugoslavia: Trouble in the Halfway House; M. Barger

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 intellec tuals in the U.S. who wanted to believe Yugo slavia had created a golden "halfway house" between capitalism and Communism. Yugo slavia was supposedly proving that there can be a "market socialism." But the dream is be coming a nightmare. Once seen as an exciting wave of the future, this hybrid socialism has fallen on hard times. And workers' self-man agement, 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 exMr. Barger, a retired public relations representative, is now a writer-consultant in Toledo, Ohio.

cessive public spending and a system that hampers the market and distorts capital invest ments. Its policies encourage excessive con sumption and the maintenance of inefficient in dustries. 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. Yugo slavia, organized as a Communist state in 1945, seemed particularly menacing with its 300,OOO-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 thou sands of people left the country with the gov ernment'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 24 THE FREEMAN. JANUARY 1988 banned, workers' self-management gave man agers considerable latitude in business negotia tions. Much of the country's agriculture con tinued to be in private hands, and a thriving private enterprise sector developed under spe cial provisions which were variants of Commu nist doctrine. Tito, a harsh Communist with amazing luck and cunning, became a Yugoslav folk hero, al though 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 sup port 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 re ceived 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 forma tion in 1918. Tito died in 1980, but it's doubtful that his death had much to do with Yu goslavia's current troubles.

Workers'Self-Management Milovan Djilas, the former Tito associate who became an outspoken critic of the Com munist system, claims credit for the adoption of workers' self-management in the country. Ac cording to his recollections, he made the pro posal 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 po sition 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 be ginning of a democracy, something that socialism had not yet achieved; further, it could be plainly seen by the world and the interna tional workers' movement as a radical depar ture 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-some thing that has never yet been achieved!' A few months later, Tito explained the Workers' Self Management Bill to the National Assembly."l The main feature of Yugoslavian self-man agement 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 ser vice and, to a certain extent, universities and similar organizations.

There was also a provision for private enter prise 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 ithe "bureaucratic collectiv ism" which was choking off economic growth in the Soviet Union. Beyond that, the decen tralized nature of self-management made polit ical sense because of the severe rivalries and jealousies among the Yugoslav republics. Not Really a Single Nation Central control is an explosive issue in Yu goslavia in view of its ethnic and regional di versity. Yugoslavia actually means "Land of the South Slavs," but it goes back only to 1918 as a unified country and has had its present YUGOSLAVIA: TROUBLE IN THE HALFWAY HOUSE 25 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, Slo venians, 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 iden tities! The fear of Serbian domination also per sists in Yugoslavia, where Belgrade is the cap ital of Serbia as well as of the federation.

In the beginning, self-management and re laxed controls seemed to produce economic wonders in Yugoslavia. This may have led ob servers to think that the Yugoslavs had found the miraculous formula that would blend the dynamism of capitalism with the supposed de mocracy of socialism. Self-management seemed to work so well for a time that its con tradictions and problems went unnoticed. Actually, there were good reasons why Yu goslavia 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 fertil izers, 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 ex ports surged to exceed $10 billion, two-thirds of this amount to countries outside the Commu nist bloc. Many of Yugoslavia's industries seemed highly competitive in world markets, and there were even astonishing reports that ef ficient Yugoslav shipbuilders wrested contracts away from the Japanese. Visiting a construc tion equipment manufacturing firm in the U.S., one might meet teams of earnest, friendly Yu goslavs 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 coun tries. 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 Com munist 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 Yugo slavia, 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 perfor mance 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 accu rate 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 26 THE FREEMAN. JANUARY 1988 fructus carries behavioral implications which were not recognized by Yugoslav economists.4 These "behavioral implications" were pre dictable. 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 invest ments were channeled to things that were most likely to benefit them directly. Not surpris ingly, 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 pro vide 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. com panies, even highly trained managers fre quently make bad capital spending choices which they regret later. Another appalling problem in Yugoslavia is protectionism practiced by the various re publics. 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 atian one, and later with a Serbian one. Dis putes 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 re publics argued over who would carry coal!s The same article also explained how politi cized 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 deci sions apparently have been made at other oper ations 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 re sponsible 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 enter prises 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 de scribed 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 deci sion-making as well as production. Borowiec quoted a British businessman he interviewed in a Belgrade hotel: "The whole thing is madYUGOSLAVIA: TROUBLE IN THE HALFWAY HOUSE 27 dening. These people take six months to make a decision that requires at the most one hour. ' , Mises on Guild Socialism Yugoslavia's troubles may be 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 ex plained, was the belief that it could create a so cialist 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 be 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 them selves in individual branches of production to determine the amount and the quality of the la bour they perform and how the material means of production thereby involved shall be ap plied," Mises said. "If the workers of a guild work less zealously or use the means of produc tion 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 so cialism 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 contradic tions 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 be a breakdown when the currency becomes virtually 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 funda mental to human nature: We all become too ig norant, too lazy, and too selfish to manage operations when we are placed in arrange ments 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 incen tives for doing so. And we all usually make de cisions with our own interests in mind.

Is There Life After Self-Management? What's ahead for Yugoslavia when the cur rent 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 op pressive central Communist or Fascist govern ment 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 tur moil and uncertainty. And for a time, the new system will seem to "work" because it eHmi nates opposition and stifles dissent. The Com munist clique that heads Yugoslavia could im pose 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 rebel lion or resistance from the republics if tight central control is re-established.

A more exciting possibility is that Yugo slavia could eventually adopt essentially capi talist forms to replace the current self-managed enterprises. The barrier to this is Communist and socialist philosophy. But it's becoming 28 THE FREEMAN. JANUARY 1988 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 Uni versity of Glasgow, flatly asserts that what Yu goslavia 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 Yugo slavia's problems without greater freedom for the self-managed enterprises. There's also a need to break down the bar riers that prevent cooperation among the various Yugoslav republics. But that will tend to happen easily and smoothly when the eco nomic interventions are eliminated. If the railway network in Yugoslavia were under pri vate ownership, for example, it would quickly discontinue the costly practice of switching en gines 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 ac cording to its productivity and efficiency. Yu goslavian managers, now still restricted by the workers' councils, would have broader au thority 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 conclu sions. We all benefit by being democratic in spirit and we should be free to associate with other producers. But the market will only re ward 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 suc cesses and have not proved either more effi cient or more democratic than other businesses. There have recently been a number of em ployee buyouts of ailing enterprises and obso lete 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 busi ness. It takes expert, alert, and energetic man agement 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 discredit able. 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 produc tive countries. Let's hope that it works out that way. 0 1. Milovan Djilas, The Impeifect 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 & World 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.