tae Hee atste : Hf ae fy : Scat Tel: Waist sierra tf sete aay szs25 RHLUBHE a ee ae a ‘ft pana Y peticciitin atte Sin > & - Hi iitet 1) 5 wie ; MP i; fa? f WW it Sid $4} hi ait q if Ah A tt Yugoslav-American Economic Relations Since World War Il Digitized by the Internet Archive in 2021 with funding from Duke University Libraries https://archive.org/details/yugoslavamerican01lamp Yugoslav-American Economic Relations Since World Wear Il John R. Lampe, Russell O. Prickett, and Ljubisa S. Adamovic Duke University Press / Durham and London 1980 © 1990 Duke University Press All rights reserved Printed in the United States of America on acid-free paper © Library of Congress Cataloging-in-Publication Data appear on the last page of this book. Contents Tables vii Preface ix Introduction: The Pragmatic Pattern of Yugoslav-American Relations 1 From Confrontation to Emergency Aid, 1945-1953 §=13 Soft Loans and Hard Bargaining: Official Relations, 1954-1964 47 Yugoslav Growth, Market Socialism, and Economic Relations with the West 72 Enter the Businessman: Commercial Relations from the 1960s 104 Paying the Piper: Borrowing, Lending, and the Debt Crisis 147 Conclusion: Crisis, Reform, and Yugoslav-American Relations 189 Notes 207 Primary Sources and Select Bibliography 227 Index 237 Zell Dre jail Se 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 Drill 5.2 6.1 Toll Tables U.S. Economic Aid and Yugoslavia’s Current Account Balance, 1948-1961 41 U.S. Shares of Yugoslav Exports and Imports, 1947-1961 42 ; PL 480 Sales and Grants, ptr and Other Loans, Other Economic Grants to Yugoslavia, 1952-1968 56 U.S. Grants and Loans to Yugoslavia, 1946-1984 70 Average Annual Growth Rates of Yugoslavia’s Gross Social Product 75 Structural Changes in the Yugoslav Economy, 1947-1984 76 Yugoslavia’s Foreign Trade and Current Account Balances, 1960-1987 97 Structure of Merchandise Exports and Imports According to Degree of Transformation, 1950 and 1984 98 Directions of Yugoslav Trade, 1972-1987 99 Yugoslav Export and Import Price Indices, 1955-1984 99 Yugoslavia’s Invisibles Account for Selected Years 101 Trade between Yugoslavia and the United States, 1962-1988 102 Eximbank’s Involvement in Yugoslavia 111 U.S.-Yugoslav Joint Ventures 130 Structure of Yugoslavia’s Debt 154 Some Lessons from Yugoslavia’s Experience 202 Preface ees ©) November 9, 1989, the Berlin wall was opened, symbol of the four-decades-long division of Europe. The following Christmas Day, Leonard Bernstein conducted a performance of Beethoven’s Ninth Sym- phony in East Berlin’s Schauspielhaus with one word changed, trans- forming Schiller’s ‘‘Ode to Joy” into an “‘Ode to Freedom.” The mind groped in vain for an event that would be more suitably commemorated by Beethoven’s masterpiece, first performed in 1824. The momentous events at the end of 1989 and the beginning of 1990— including the opening of the Berlin wall, the unseating of Commu- nist regimes in Eastern Europe, the renunciation of their ‘“‘leading roles’’ by the Communist parties in Yugoslavia, Eastern Europe, and the Soviet Union, as well as the Soviet Union’s own struggle to reconcile its efforts at political and economic reform with ethnic strife and threats of secession in some of its constituent republics—will challenge scholars for many years to assess their full significance. In the meantime, government officials, bankers, lawyers, business people, and ordinary citizens con- cerned with these countries will have to work out the significance of these events for their own pursuits. The new political and economic circumstances being created in Yugoslavia, Eastern Europe, and the Soviet Union will inevitably require profound changes in their external as well as internal affairs. These changes will create new economic challenges and opportunities in the fields of business, finance, and investment as well as in intergovernmen- tal relations. Past experience will provide only a partial guide for action in this new environment, but such experience as does exist in dealings between representatives of traditional capitalist societies and indepen- x Preface dent Communist (or formerly Communist) countries will be at a pre- mium. The present volume, a history of the economic relations between Yugoslavia and the United States since World War II, records, we believe, a good deal of experience that can be helpful to those who are creating the international economic relations that will continue into the next century. When we began to write this book in 1986, we found it striking that the Yugoslav-American economic relationship had maintained its gener- ally positive character and ability to overcome difficulties over roughly four decades, despite the profound differences in circumstances and ideology that separated the two countries. We hoped to provide an objective account of the relationship which, being binational in author- ship and available in the languages of both countries, could provide a useful reference and historical review, not only for scholars, but also for professionals in government, business, and banking in both countries. In particular we aimed to provide a basis for encouragement when dealings became difficult, by referring to past problems encountered and in the main successfully resolved. We also anticipated that the detailed descrip- tion of Yugoslavia’s international debt crisis and its resolution would be of interest to those concerned with developing countries’ debt problems and debt rescheduling negotiations. We believe these aims remain essentially valid, especially for practi- tioners in the Yugoslav-American relationship. In addition, however, considering the problems facing the Yugoslav economy and the wide- spread and difficult changes taking place there and in the other countries mentioned above, we believe this book can provide a reference to some of the challenges inherent in efforts at economic reform and to some of the limited but positive contributions that relations with the United States can make to the reform process. We began our study by addressing a set of historical issues. Principal among these were the ways in which economic and commercial relations have worked remarkably well between the two countries after overcom- ing initial obstacles; however, issues of aid and then trade also provided a focus for some political differences between the two governments. The economic size and impact of aid and trade should not be exaggerated, nor certain difficulties in dealing with the United States minimized. At the same time the resulting connections between individuals, enterprises, and institutions on both sides have been crucial to the most successful set of American relations with any Communist country. Here also were the first large-scale and the longest-standing relations of independent Yugo- slavia with a capitalist economy since the Tito-Stalin split of 1948. Preface xi We undertake to examine not only how this happened but also the contemporary question of how these relations have contributed to a stronger international position for the Yugoslav economy than is gener- ally recognized, even as so many of its domestic weaknesses and ineffi- ciencies have persisted. We have not attempted to produce a comprehen- sive technical description or criticism of Yugoslavia’s economic system or policies. Others, whom we have cited, have done this well. At the same time the story would not be complete (or comprehensible) without some critical analysis, which we have endeavored to provide. The authors are greatly indebted to many individuals in Yugoslavia, the United States, and various organizations who provided encourage- ment, information, and insights without which this book would not have been possible. In particular, parts of the manuscript benefited greatly from critical readings by John C. Campbell and Leonard Weiss. The book also benefited from the authors’ attendance at several meetings of the U.S.-Yugoslav Economic Council in Yugoslavia and the United States and participation in the conference of the Wilson Center’s East European Program, ‘“Yugoslav-American Relations, 1944-1965,” held in Belgrade in September 1988 with the Institute of Contemporary History. To those whom we may have inadvertently neglected to mention in our “Primary Sources and Select Bibliography,” we offer our apologies, as we do for any errors of presentation or interpretation. The responsibility for these rests, of course, with the authors. John Lampe is primarily responsible for chapters 1-3, Ljubisa Adamovic¢ for chapter 4, and Russell Prickett for chapters 5-7. A igh ii yee LA) iu & Aan) ee ee a fy h: [> ! ih ‘hie Waa et ni een Cobia, we ies “* ‘4 Introduction: The Pragmatic Pattern of Yugoslav-American Relations gums YUgOslav-American relations since the Tito-Stalin split have been pragmatic and positive for the most part, despite enduring ideologi- cal differences between the two governments. The emergence of a com- mon adversary, the USSR, ended the initial postwar confrontation in 1948 but did not prevent subsequent episodes of misunderstanding and frustration for both sides. Yet specific disagreements have typically been resolved in a forthcoming fashion which left the closest participants with more respect for the other side. Economic issues, the focus of this volume, have consistently been at the center of these strains and successes. In easier times the experience of individual American businessmen and scholars, as well as government officials who worked comfortably with their Yugoslav counterparts, stored up understanding and good will, which have facilitated frank discussions when serious problems, politi- cal or economic, have arisen. Political imperatives have sometimes obscured the importance of economic relations between the two countries, especially during the first twenty years after World War II. Both sides tended to see their immediate postwar confrontation in political terms. Until 1948 U.S. officials repeat- edly categorized the new Communist regime as the Soviet Union’s most faithful satellite. Yugoslav party leaders saw Anglo-American pressure as the principal threat to their consolidation of domestic political power. Tito and his followers assumed, with some justification, that the long wartime struggle of their Partisan forces against the occupation regimes had earned them the right to take power in postwar Yugoslavia. The Tito-Stalin split of 1948 prompted both the Yugoslav and Ameri- can governments to reappraise their political relations. Suddenly they 2 Yugoslav-American Economic Relations shared a common adversary, perhaps the most compelling of reasons for diplomatic rapprochement. By the mid-1950s Yugoslavia had reestab- lished normal relations with the USSR, but on its own terms. In 1961 President Tito emerged as one of the three founding fathers, along with India’s Nehru and Egypt’s Nasser, of the new nonaligned movement of mainly Third World countries. Both of these developments imposed new but tolerable strains on Yugoslav-American relations. So, from the Yugo- slav side, did American assistance for Israel and military involvement in Vietnam. Neither of the two countries—one the major power in the postwar Western world and the other a small Communist state on the edge of Eastern Europe—had really expected to be allies, even during the peak of Soviet pressure on Yugoslavia in the early 1950s. What emerged instead was a relationship based, when it worked best, on each side’s recognition of the other’s different political principles and foreign policy. Here was an approach fundamental to Yugoslav notions of independence and non- alignment, and it succeeded with a superpower. Here also was the first and most fruitful American accommodation with a ruling Communist regime. Some of the credit does indeed belong to personal diplomacy, in particular to negotiations between Josip Broz Tito and a series of able American ambassadors but also over the years to a long list of diplomatic and other representatives of the two countries. The evolution of this relationship along increasingly pragmatic, even non-ideological lines would remain incomprehensible without its eco- nomic dimension. During the first postwar decade economic issues were crucial to the state of political relations, both bad and good. The 1945 decision by Tito’s government to reaffirm the 1881 Treaty of Friendship, Commerce, and Navigation between the United States and Serbia was carried over to interwar Yugoslavia and now served as an existing, legitimate basis for post-1948 economic relations between the two coun- tries. From the early 1950s forward, the slow but persistent Yugoslav turn away from centralized administration of the economy on the Soviet model and its search for ‘‘market socialism”’ made it easier for the U.S. to continue official aid until 1963, long after the Soviet and Eastern Europe boycott on Yugoslav trade had ended. Decentralization and liberalization became important features of the Yugoslav economy during the 1960s. Whatever domestic potential for future inflation and unemployment these features created, they had two further, far-reaching effects on Yugoslav-American relations. First, they attracted private American business interests to deal with essentially Introduction 3 independent Yugoslav enterprises and banks. Second, greater freedom for individuals as well as enterprises significantly enhanced the small, uncertain image of Yugoslavia in the eyes of the American public and policy makers. That same freedom allowed many Yugoslavs and Ameri- cans to study or to visit each other’s countries without Soviet-style re- strictions. Even before connections between American companies or banks and their Yugoslav counterparts began to multiply, the relationship between the two economies began to take on a life of its own, beyond the political imperatives that had first thrust them together. That separate life and its own political repercussions are a principal concern of this volume. The next two chapters treat the largely official relations of the first two postwar decades. The fourth traces the overall role of foreign economic relations in the growth of the Yugoslav economy and the struggle toward market socialism since the 1960s. This chapter places the American contribution in an aggregate statistical perspective that suggests it was small. Chapter 5 uses a series of case studies to suggest a larger contribu- tion. These private American trade ventures and investment projects, bolstered by several official programs, brought Western business prac- tices and technology to pivotal parts of the Yugoslav economy. Chapter 6 turns to the more troublesome issue of financial relations since the 1970s, when indiscriminate international lending and some injudicious Yu- goslav borrowing plunged the country into a debt crisis in the early 1980s. The U.S. government, private banks, and three major international finan- cial organizations—the International Monetary Fund (1mr), the World Bank, and the Bank for International Settlements (B1s)—all played impor- tant roles in helping Yugoslavia avoid default on its international finan- cial obligations. A concluding chapter addresses the Yugoslav economic crisis of the late 1980s and reform legislation aimed at completing the long-term efforts to create a market-oriented economy linked more closely to the world economy. We appraise the interactions of American economic assistance, trade, investment, financial credits, and debt relief with Yugoslavia’s own efforts at economic reform. We note that these efforts have been underway much longer than in the case of any of Yugoslavia’s East European neighbors, whose current policies include the pursuit of American aid and investment. What lessons might Yugoslav-American relations hold for Poland and Hungary? These lessons should be drawn against a two-dimensional back- ground. One is the pattern and potential of Yugoslav economic growth before this long postwar period. This dimension includes the earlier 4 Yugoslav-American Economic Relations Yugoslav experience, similar to Poland’s and not greatly different from Hungary’s, with the international economy and the great powers. Some postwar patterns and dilemmas had already appeared before World War II and even before First World War I. The second historical dimension is the foreign economic policy of the United States, which is broadly defined to include the disposition of its business community toward trade or over- seas investment. Any American policy toward Yugoslavia, or any Yugoslav policy toward the U.S., would eventually have to operate within these two boundaries. Let us begin by sketching this Yugoslav and American background briefly. Yugoslav Growth and Commercial Relations before 1945 —Woodrow Wilson’s proclamation of national self-determination as one of his famous fourteen points for the peace settlement of 1919 initiated an important American role in the creation of the first unified Yugoslav state. This may be said despite the failure of Point 11 to mention a Yugoslav state specifically or of President Wilson himself to apply the principle of self-determination consistently to the new Yugoslav border with Italy. Despite this the general American statements of official sym- pathy for a Yugoslav state were tremendously encouraging to Serbian and Croatian representatives at the Paris peace conference. We cannot say that the United States played any significant part in the economic growth of the Yugoslav lands before or after World War I. The range of Yugoslav commercial and financial links to the more de- veloped European economies, however, did expand to modern propor- tions. The prospects for further economic growth were at the same time limited, even if World War I and then the 1930s depression had not intervened. The relations of the Yugoslav lands with the major European economies were instrumental both in the growth that did occur and the limits that stood in the way of sustained development. During the nineteenth century only Serbia and tiny Montenegro had emerged as independent states among Yugoslav lands otherwise divided between the Austro-Hungarian and Ottoman Empires. During the post-1900 decade Serbia’s foreign trade grew by 10 percent a year, faster than our rough notions of the rate of growth in its national product. This arguably export-led growth supported a rise in state revenues, which proceeded a few percentage points faster even than trade. Augmenting state revenues were foreign, largely French loans. Over three-quarters of these loans were unfortunately spent on debt service, armaments, or the state bureaucracy. This did however assist the Serbian state in working Introduction 5 sufficiently free of Austro-Hungarian domination to win the tariff war of 1906-11 and reorient the bulk of its trade elsewhere in Europe, a useful precedent for the break with the Soviet Union and Eastern Europe in 1948. The price for this initial economic victory was high, however. An overvalued exchange rate of the dinar for the French franc encouraged imports over exports and also failed to attract the private European capital to industrial investment that had been expected. The Habsburg lands were insulated from the hazards of a small, separate currency or the international borrowing that confronted Serbia and also from the internal disorder that kept Ottoman Macedonia more backward than any of these territories. Otherwise, the economies of Austrian Slovenia, Dalmatia, and the Vojvodina, the Hungarian Croatia- Slavonia, and the jointly administered Bosnia-Hercegovina did not differ significantly from Serbia’s.? The fledgling industrial firms and commer- cial banks in all the Yugoslav lands except Macedonia and independent Montenegro grew rapidly during the last pre-1914 decade but represented small sectors still not well connected with each other or the rest of the economy. The bulk of economic activity was of course agricultural, accounting for three-quarters of production and four-fifths of the population. The relatively low density of population across the Yugoslav lands earlier in the nineteenth century had initially promised increasing prosperity from grain and livestock exports without widespread use of intensive methods and modern equipment. By the turn of the century, however, even relatively fertile Croatia-Slavonia was facing the same limits on extensive agricultural growth as was Serbia. Growing Hungarian modernization and protectionist pressure ended easy, unlimited access to the major urban markets in the Czech and Austrian lands. Less than 40 percent of the Yugoslav lands were arable anyway, with rugged uplands constitut- ing grain deficit areas. Rainfall on the fertile lowlands was less than in Western Europe or the American midwest. By 1900 rural population growth was sufficient to turn grain output and area per capita and even real grain exports per capita downward.* The increasing importance of American and Canadian grain and meat packing for Western European markets kept Yugoslav grain and livestock confined to Central Europe. Worsening agricultural prospects and the limited chances for other employment in Austria-Hungary’s Yugoslav lands may be seen in the rising rate of emigration, much of it to the United States. American statistics recorded 356,000 Croat and Slovene immigrants for 1899-1910 and another 225,000 by the passage of restrictive legisla- tion in 1923. Perhaps 100,000 Serbs had also entered by World War I. 6 Yugoslav-American Economic Relations Some arrivals returned, especially at the start of the war, but enough settled permanently to make the total of Yugoslav origin in the 1960 U.S. census 449,000.° Serbia’s trade with the United States, the world’s largest agricultural exporter, remained miniscule, consisting mainly of imports of American kerosene and machinery. Imports never exceeded 5 percent of the Serbian total, while exports to the United States, principally prunes, never went past 1 percent of Serbian exports.® The pre-1914 period was nonetheless significant for future relations because of the commercial and consular agreement signed between the two governments in 1881. The American extension of most-favored-nation treatment to Serbia would remain the basis of unbroken commercial relations, not only with the first Yugo- slavia, but, as already noted, with the Communist regime from 1945 forward. The interwar period would witness a small, belated rise in American trade shares with the first Yugoslavia, but only when the country’s real per capita imports fell below the pre-1914 level during the 1930s depres- sion. Yugoslav foreign trade had grown impressively during the 1920s, however, by some 60 percent for 1925—29 in real per capita terms over the 1906—10 Serbian level. Grain exports had declined by one third from their prewar value, but timber and several nonferrous minerals more than filled the gap. None of this was sufficient, however, to raise our crude estimates of the growth rate in national product for 1923-29 beyond 2 percent per year. Modern manufacturing grew at only 4 percent a year for 1923-29. Its initial advance of 6 percent a year for 1918—23 offers us a clue to one important limitation on subsequent Yugoslav growth across the interwar period. These were the only years in which Yugoslav access to the major prewar markets of Austria-Hungary remained significant, and then only because those two small, then independent states were desperate for food supplies and even manufactures. The western Yugoslav lands of Croatia and Slovenia took virtually all of the advantage from this opportunity because of previous association, greater proximity, and far less war damage than had been experienced by Serbia or Macedonia.” As a result the northeast-southwest disparity in the economic development of the Yugoslav lands may have received a larger impetus than the entire pre-1914 period had provided. The preponderance of political power in interwar Yugoslavia lay on the Serbian side, however. One economic result was a large, Serbian- dominated state apparatus whose personnel were seven times the prewar aggregate of the component parts and whose budgetary resources were Introduction 7 twice the prewar total. Another less recognized result was a stalemate over state economic policy. The central bank in Belgrade and the power- ful private institutions in Croatia and Slovenia avoided each other, as did the respective sets of cooperative agricultural banks. Regional disagree- ment barred the way to a common agricultural bank until 1929 and to an industrial encouragement law until 1934, too late to help significantly. State-owned enterprises accounted for just 15 percent of industrial and mining capital by 1938. Yet these holdings dominated the three potentially important branches of tobacco manufacture, iron mining, and steel production. The state tobacco monopoly’s overpricing forfeited any export potential it might have had. The iron and steel industries failed to invest in needed modernization until rearmament ironically prompted the acceptance of capital and equipment from Nazi Germany.® Private foreign investment before the 1930s depression had come mainly from the former Habsburg lands (Austria, Hungary, and Czecho- slovakia) and from Britain and France. Scholars have exaggerated the foreign share in investment during the 1920s by assuming that any foreign participation in joint-stock firms accounted for 100 percent of their capital and that incorporated firms were 100 percent of the enterprises in the branch of industry. Thus the foreign share of total industrial capital undoubtedly fell short of the 60 percent calculated for 1937 on these assumptions. Nonetheless, it was still a great majority in electrical power, chemicals, nonferrous mining, and Croatian timber. Yugoslav scholars have claimed, with some Western support, that this investment encour- aged the growth of restrictive cartel arrangements and that foreign mining and timber ventures put little capital into further processing, especially for the domestic Yugoslav market. The notion that heavy investment in these sectors diverted domestic capital from heavy industry or manufac- tured exports seems much harder to accept, given electric power’s and mining’s domination by state enterprises and lumbering’s distribution primarily among small-scale private partnerships. Yet for our purposes it is important to record the Yugoslav perception, widespread by the 1930s even outside Communist circles, that little had been gained from the large-scale foreign investment of the 1920s.9 In addition, Western lending to the Yugoslav government was well below the level provided to Serbia and the other Balkan states before World War I. In constant exchange values Yugoslavia had added only 3 percent by 1930 to the real value of the Serbian state’s 1911 debt. Interwar Western European lending was limited throughout Southeastern Europe, but more so for a Yugoslav government that would not accept the restrictions on note issue or exchange rates imposed by Western banks 8 Yugoslav-American Economic Relations under the auspices of the League of Nations. The stabilization of a badly inflated dinar in 1925 was achieved without the aide of a League loan, but an overvalued exchange rate was still required to keep open the promise of any future loans. This overvaluation hurt exports and forced the central bank in Belgrade to contract the country’s currency and credit supply by one-fourth in order to defend it.1° The government’s decision to seek a French loan for a complete return to the gold standard in 1931 could not have been less fortunately timed. The major Austrian commercial bank, the Kredit-Anstalt, failed three days before the dinar was to become fully convertible and Britain left the gold standard shortly thereafter. This unhappy interwar experience with international trade and finance may have inhibited the postwar Yugoslav approach to foreign economic relations long after the Communist leadership had abandoned its initial commitment to an autarkic socialist bloc headed by the Soviet Union. Helping to overcome Yugoslavia’s reluctance were a series of official, largely American aid programs and some new financial institu- tions, especially the World Bank, concerned with recovery and develop- ment rather than debt collection. Since World War II foreign trade has played a larger role despite the continuing attraction of a large domestic market, currently 23 million people. Trade growth has outpaced and thus to some extent led the growth of national product, as it has for postwar Europe as a whole. For both Eastern and Western Europe, trade turnover (exports plus imports) grew at 9 percent a year for the period 1950—70 and gross domestic product rose by 6 percent, in contrast to averages under 2 percent for both of these indicators during the 1920s. The Yugoslav rates of such growth match these European averages almost exactly for both time periods.1! By the late 1960s the American share of this much increased Yugo- slav trade had settled back to the modest 5 to 6 percent share that it had already held by the 1930s, but its importance was greater than the numbers would indicate. To understand the considerably wider role of the United States in Yugoslavia’s participation in the international econ- omy, we must first outline the larger impact that foreign economic policy made on the postwar American economy. Postwar American Policy and the International Economy — The United States emerged from World War II strongly committed to strengthening international political and economic institutions. Much of the American leadership and a significant share of public opinion Introduction 9 believed that U.S. isolationism and protectionism in general, and the failure to join the League of Nations in particular, had worsened the worldwide depression of the 1930s and helped to sow the seeds for World War II. The United Nations was therefore launched in 1945 with broadly based American support. Although less broadly based, U.S. support was still sufficient to see through the subsequent formation of new interna- tional economic institutions: the International Monetary Fund, the Inter- national Bank for Reconstruction and Development, and the General Agreement on Tariffs and Trade. Together they were intended to reduce the sort of international trade and financial barriers that had plagued the interwar period. Protective tariffs had traditionally been at the center of foreign economic policy for the United States, but the domestic framework for their repeated postwar reduction was already in place by 1934. The Reciprocal Trade Agreements Act of that year made bilateral agreements for most-favored-nation (MFN) treatment the vehicle for implementing tariff cuts of up to one-half in existing rates. Those rates had averaged 59 percent ad valorem since the notorious Smoot-Hawley tariff of 1930 was put together by protectionist, largely Republican interests represented in the Congress. The huge Democratic majority by 1934 was more represen- tative of agricultural exporters and urban consumers than of protectionist manufactures. Swayed by the activist spirit of the New Deal, the Congress passed legislation giving the president and the State Department primary authority to negotiate future tariff reductions. That authority has re- mained with the executive branch ever since. Against continuing Repub- lican opposition in Congress, the Democratic majority renewed the 1934 Act in 1937, 1940, and 1943. In 1945 it authorized the executive branch to negotiate tariff reductions by another one-half beyond those already achieved since 1934. As a result the average incidence of tariffs on total U.S. import value had fallen to 26 percent by 1946, 12.5 percent by 1951, 11 percent by 1968, and to just 8 percent ad valorem by 1978.12 Despite these tariff cuts U.S. trade turnover (exports plus imports) as a share of gross national product actually fell from 13 to 7 percent in the immediate postwar period from 1945 to 1950 and made most of its climb toward the present level of 25 percent during the post-1960 de- cades. Earlier and stronger stimulus came from two other quarters. First, an increasing number of Republican Congressmen, a majority by the Eisenhower presidency, became converted, along with the larger Ameri- can manufacturers, to supporting freer trade. Second, the postwar Ameri- can commitment to founding a worldwide mechanism for freer trade had 10 Yugoslav-American Economic Relations been instrumental in establishing the multilateral General Agreement on Trade and Tariffs (GATT) in 1947. American participation in the first three rounds of Gatr conferences was responsible for the reduction of U.S. duties by more than one-half by 1951. Two further, equivalent reduc- tions, authorized by President Kennedy’s Trade Expansion Act of 1962 and President Nixon’s Trade Reform Act of 1974, resulted primarily from several years of subsequent GATT negotiations at the so-called Kennedy and Tokyo Rounds. By the time the 1974 legislation was being consid- ered, Democratic calls for new measures to protect declining industries led to reinforcing the escape clauses and ‘“‘peril point’ provisions for higher rates which had been introduced under Republican sponsorship early in the postwar period. Throughout this period, however, the execu- tive branch retained the upper hand in setting commercial policy, sup- ported by many members of Congress from both parties who favored a single national policy of trade liberalization over giving way to protec- tionist pressures from a series of special interests.13 The ongoing contest between the executive branch and the Congress, which determined more of postwar American policy than conflict be- tween the two parties, had been even sharper on the subject of foreign economic aid than on trade liberalization. Each of the four major phases in the postwar aid program have seen the executive preference for long- term grants under State Department control at odds with the congres- sional preference for annual approval and repayable loans under a separate agency. Aid granted directly from domestic tax revenues to foreign governments was of course unprecedented in American history. Failure to provide such aid to Europe after World War I, it was widely believed, helped to cause World War II. This argument persuaded Presi- dent Truman’s administration and many congressmen in both parties to support Secretary of State George Marshall’s famous 1947 plan for a European Recovery Program (ERP). Even then Congress voted the authori- zation of $17 billion worth of grants to the Erp for the period 1948—52 only under annual congressional approval and with disbursement under a separate Economic Cooperation Administration (ECA). Questions quickly arose in the Congress during the initial period about supporting a Yugoslavia that, although expelled from the Soviet bloc by 1948, was still a Communist regime whose foreign policy often differed with that of the United States. Questions became more frequent during the second and third phases of postwar American aid programs. The era of the Mutual Security Act (mMsa), 1952-61, began with the rapid American transition from granting mainly economic to mainly military Introduction 11 aid. In response to the Korean War, the military share reached three- quarters of the 1951-54 total. By 1954, however, the Eisenhower adminis- tration took several steps that opened the way to a renewed emphasis on economic aid.14 A mounting surplus of farm products brought the Con- gress and the Agriculture Department together to pass Public Law 480, which authorized food sales abroad for local currency. This was followed in 1957 by the creation of the Developmental Loan Fund (pLF) whose disbursements were also repayable in local currency. These two devices, both heavily used by Yugoslavia, pushed the economic share of American aid back up to one-half for 1955-59. Then in 1961 the Kennedy adminis- tration announced a policy turn toward aid to developing countries. It replaced the msa with the Agency for International Development (arp) and kept it administratively separate from the State Department. Con- gress refused the administration’s request for a five-year authorization and drastically reduced its annual allocations by the late 1960s. Since 1973 the fourth phase of the American program has worked through arp and other agencies to provide relief aid only to the least developed of Third World economies. Yugoslavia had left the list of those seeking grant aid from the United States long before, in 1963, and turned instead to seeking development loans and supplier credits on favorable terms. This search led in several directions, including the U.S. Export-Import Bank and other countries’ export financing organizations, the European Investment Bank (£1s), and the International Bank for Reconstruction and Development (1srp, known first informally and then formally as the World Bank), which the United States had helped to found in 1945 and Yugoslavia had joined as a charter member. The United States, as the largest single contributor and vote holder in the 1nrp (up to a 25 percent maximum), would wield considerable but not unlimited leverage in its decisions on long-term development loans. The iBRD’s Articles of Agreement and its reorganization in 1947 under the leadership of conservative American bankers committed the World Bank to a policy of cautious conditional lending which favored public utilities over export promotion. The World Bank’s need to raise capital by selling its bonds on the New York market reinforced this approach and severely limited its loanable funds. By the late 1950s, however, the Eisenhower administration joined the 1srp’s American president, Eugene Black, in relaxing the restrictive terms on development loans. The private sector of the American economy had been slower gener- ally than public policy to look outward and to Europe in particular 12 Yugoslav-American Economic Relations following World War II. During the first postwar decade, with investment pouring into domestic peacetime production, direct American foreign investment had barely regained its 1928 level. By the late 1950s, however, U.S. multinational corporations were shifting their expanding foreign investments from primary production in Latin America and the Middle East to manufacturing consumer goods or advanced technology in Western Europe. By 1970 this shift had placed over 30 percent of U.S. direct foreign investment and 42 percent of manufacturing investment in Western Europe.!> By this time American banks had also established a major European presence, with some 116 branches. The growing deposit of petrodollars from opsc oil exporters in the early 1970s added to their supply of so-called Eurodollars (i.e., dollars held outside the United States) and prompted a lending boom. How Yugoslavia made much greater use of such loans than of direct American investment, and with what unhappy result, will be considered in Chapters 5 and 6. In 1971 the weakness of the American dollar as the primary reserve currency, after a decade of trade deficits and of substantial outflow of U.S. gold reserves, prompted the Nixon administration to negotiate with the International Monetary Fund (imr) and other major currency countries. They agreed to accept floating exchange rates, end the dollar’s convert- ibility to gold, and approve the creation of a new reserve instrument based on IMF resources, Special Drawing Rights (spr).!© Ironically the United States was the first customer for the pooled reserve of hard currency credit that would prove crucial to Yugoslav solvency by the early 1980s. The freely floating exchange rate established for the dollar in 1972 as part of the spr agreement gave a new respectability to policies of significant depreciation in currency values, which the Yugoslav dinar followed with a vengeance during the 1980s as one of the conditions for mF assistance. Two more general questions will recur throughout the subsequent chapters. Where have Yugoslavia’s economic relations with the United States reflected the unique political dynamics between the two countries which sustained a balance between common interests and divergent viewpoints for nearly forty years? Where have they responded, as they are increasingly likely to do, to wider trends in the American, the European, or the Yugoslav economy? From Confrontation to Emergency Aid, 1945—1953 eum the years surrounding the Tito-Stalin split of 1948 were witness to a nearly diametric reversal in diplomatic relations between Yugoslavia and the United States. Stalin’s ill-fated attempt to subordinate Yugoslavia’s Communist leadership transformed the worst American relationship with an Eastern European country in 1945-46 into the best of the lot by the early 1950s. The economic dimension of this well-known transformation nurtured perhaps its most important political feature. The experience of American aid made noninterference in Yugoslav internal affairs a working principle in Great Power relations with Yugoslavia for the first time. By 1954 Stalin was dead and the Soviet Union was on the road to accepting such noninterference as the cornerstone of renewed contact with Yugoslavia, however much it might continue to desire its eventual reintegration into the Soviet bloc. By then the Tito regime had also accepted the principle of external accountability for its use of economic aid, mainly because of its dealings with the United States. U.S. policy would continue to press for greater political accountability and openness in Yugoslavia, but the readiness to conduct a full set of relations with a Communist regime, albeit an independent one, would persist here as nowhere else in the world. America’s economic relationship with postwar Yugoslavia hardly underwent a sudden, dramatic reversal on June 28, 1948, when the latter’s dispute with the Soviet Union became public. Both sides required years rather than days for such a major reorientation. Important steps toward a less contentious relationship had already been taken before the Tito- Stalin split. Afterwards direct American aid did not peak until 1953, when it accounted for 31 percent of Yugoslav imports. Only during the 14 Yugoslav-American Economic Relations subsequent decade did a more complex, less direct official relationship emerge, based on credits rather than grants and demanding frequent and increasingly difficult congressional approval, while trade with the Amer- ican private sector became significant in the early 1960s. The ground rules for economic relations between the two governments were, how- ever, largely in place by 1953. For the Yugoslav economy they had taken shape during a period of rapid postwar recovery followed by recurring agricultural and payment crises. These ground rules owed remarkably little to the pattern of interwar and wartime economic relations. It was the limited nature of those earlier official relations that contributed both to intitial postwar confrontation and to the subsequent reconciliation between Yugoslavia and the United States. As for the American private sector, however, several patterns developed during the 1930s that would recur by the 1970s, when trade with and investment in Yugoslavia remained at relatively modest levels. Interwar and Wartime Limitations —Expectations ran high in New York financial circles and higher still in Belgrade during the first years after World War I. The newly created state of Yugoslavia would surely attract sizable American trade and investment and perhaps even bring a branch of a major American bank to its capital. The new state constituted the largest market in Eastern Europe after Poland. Its territory contained large deposits of nonferrous ores. What then discouraged American investors? Independent Serbia had been an admired American ally in the recent war. Alas, it had like other allies borrowed money from a U.S. Treasury Department whose major postwar concern was repayment, not recon- struction. An official Yugoslav request in 1919 for a treasury loan to cover just $5 million of the $61 million debt owed to the United States was summarily refused. Subsequent Yugoslav efforts to borrow much larger sums of several hundred million dollars on the New York bond market were frustrated, not only by this outstanding official debt, but also by unpaid obligations to Standard Oil and several other private American firms. The belated and expensive Blair loan of 1922 ($25 million in bonds offered at 8 percent) removed these private obligations but left the payment of public debt still unresolved. Only in 1926, when the Yugoslav side agreed to arepayment schedule, did the U.S. State Department lift its advisory warnings against further private lending to Yugoslavia. Another Blair loan of $30 million was quickly offered, and on better terms, but no From Confrontation to Emergency Aid 15 others followed until a small $5 million loan for debt funding well into the 1930s depression.? Whether much private investment and bank capital would have flowed into Yugoslavia from the United States during the 1920s without the burden of unresolved debt is open to serious doubt. American investment abroad grew no faster than U.S. national income from 1919 to 1929 and then principally because of increases in Central America, South America, and Great Britain. Of their direct investments in Europe in 1929, American companies had placed less than 4 percent in Eastern Europe and only 0.5 percent in Yugoslavia.2 Helping to divert funds from Yugoslavia were discouraging reports from the U.S. Department of Com- merce on the profitability of existing British and French investments in the major mines for nonferrous metals. American exports to Yugoslavia were also surprisingly small. They rose slowly from 2.4 to 4.9 percent of the latter’s import value from 1920 to 1928 and included few manufactured goods. Yugoslav exports to the U.S. were barely 1 percent of Yugoslavia’s total export value during this period of relative prosperity. In 1928 the U.S. Bureau of Foreign and Domestic Commerce finally issued a favorable country analysis for Yugo- slavia and two years later dispatched what amounted to the first Ameri- can commercial attaché to the American legation in Belgrade. Emil Kekich promoted trade energetically until budgetary restraints closed the Belgrade office in 1933. He could not in any case overcome the combined discouragements of the world depression and two subsequent American measures, the high Smoot-Hawley tariff of 1930 and the Hoover Mor- atorium on the payment of reparations debts in 1932. The latter measure cut Yugoslavia off from anticipated German payments. This loss quickly forced Yugoslavia into default on the $61 million owed the United States for war debts and some $50 million in private postwar obligations, mainly to bondholders of the two Blair loans.? Both sets of obligations would remain to be settled after World War II. American exports to Yugoslavia fell to 38 percent of their modest 1928 value by 1933 but then doubled by 1937-38 to reach 6 percent of a Yugoslav import value that the depression had cut in half.4 Raw cotton, automobiles, and tires led the way. It was just such trade promotion that the Roosevelt administration had in mind when it set aside some of the Smoot-Hawley restrictions on U.S. imports of raw materials and agri- cultural products. Sales to the United States had meanwhile approached 5 percent of total Yugoslav export value. Much of this increase, however, resulted from Yugoslavia’s loss of valuable trade ties with Italy from 1935 16 Yugoslav-American Economic Relations forward, a consequence of its respecting the League of Nations’ sanctions imposed on Italy after Mussolini’s conquest of Ethiopia. Ironically the larger effect on Yugoslav trade from this honorable decision was to turn it toward Nazi Germany under the sort of clearing agreement that already characterized most foreign trade in Central and Eastern Europe. Such agreements were of course anathema to Roosevelt’s secretary of state, the ardent free trader Cordell Hull, and for that matter most of the American business community. Little wonder, therefore, that the new U.S. Export- Import Bank, founded in 1934 to lend money in support of the expansion of American exports, extended no significant credit to Yugoslavia before the war. In 1936 the Yugoslav National Bank imposed import quotas on autos and other selected manufactures not covered by clearing agreements, affecting some 15 percent of U.S. export value to Yugoslavia. Two years of negotiations between the two governments succeeded only in exempting American auto sales. Other American manufacturers sought official re- dress and, failing that, typically withdrew. Only Chrysler and a few other U.S. firms pioneered the countertrade arrangements by which the Yugoslav side offered exemption from the quotas. This was a practice that Douglas Aircraft Co. (now McDonnell-Douglas) would successfully redis- cover in the late 1960s as the way to sell expensive passenger aircraft to the Yugoslavs. Direct American investment in Yugoslavia also grew during the 1930s, nearly quadrupling in absolute value to pass $25 million by 1939, but the rate of increase is deceptive. It brought the American share up to just 10 percent of total foreign investment in Yugoslavia, ranking fifth behind Great Britain, France, Germany (including Austria), and Switzer- land. A small number of firms accounted for the American advance. Oil companies took the lead, as they did in American multinational initia- tives throughout Europe during the interwar period. Most prominent was Socony-Vacuum (i.e., Standard Oil of New York), whose $13 million investment represented half of the U.S. total as well as half of the foreign capital that dominated Yugoslav petroleum extraction and refining.® Recent Yugoslav scholarship criticizes the permanent extraction of a relatively scarce raw material for use outside the country but bases its case on widely accepted canons of development economics rather than Leninist ideological assumptions. We should note that Yugoslav tax laws pushed Standard Oil to purchase and modernize its own refinery in Yugoslavia. How much of this refined product was then sold on the domestic market remains unclear. From Confrontation to Emergency Aid 17 It is clear, however, that foreign exchange regulations imposed by the Yugoslav National Bank in the late 1930s halved the rate of exportable dollar profits for Standard Oil and other American investors.” These included several electric power and telephone companies (an Interna- tional Telephone and Telegraph [ITT] affiliate and the Yugoslav- American Electric Co.), which provided a quarter of the American total but amounted to less than 10 percent of 1938 foreign investment in that branch. They undertook limited modernization of existing facilities. Other investments in textile production, lead and bauxite mining, and foreign trade accounted for the remaining one-quarter of U.S. investment value, bringing the total number of American firms to just 21 of 376 joint- stock enterprises in which foreign captital predominated.® The defeat and dismemberment of the kingdom of Yugoslavia by Nazi Germany in April 1941, cut off American contact with these few direct investments as trade between the two countries ended for the duration of World War II. The long interruption in contact with their investors left many of these enterprises open to heavy pressures to aid the German war effort. Such collaboration set the stage for their nationalization by the new Communist regime in the immediate postwar period. As the war was drawing to a close, American supplies to support the Partisan movement became increasingly important. The British decision of 1943 to support Tito’s Communist-led Partisans rather than the Serbian royalist Chetniks of Draza Mihailovié was crucial. The American military command in Italy joined the British in sending arms and other badly needed supplies across the Adriatic by plane and small boat to the Partisans. These deliveries, together with those of British origin, report- edly amounted to 76,000 tons, about 95 percent of the supplies that the Partisans received from all foreign sources (aside from the crucial Yugoslav confiscations of Italian materiel in 1943).9 By mid-1944 the increasing Allied shipments were predominantly of American origin, although still mainly delivered by the British. The great majority of the $32 million worth of Lend-Lease aid given by the United States to the Yugoslav war effort came to the Partisans in 1944. A smaller amount of Russian supplies arrived with the Red Army that fall. Yet the arrival of Allied supplies did not create a store of goodwill for postwar Yugoslav-American relations, as some U.S. officials might have assumed. Most of the aid was perceived to have come from the British, who delivered it. More important the Yugoslav Communist leadership obviously shared ideological and also pan-Slavic affinities with the Soviet Union, affinities renewed after Tito’s trip to Moscow in Septem- 18 Yugoslav-American Economic Relations ber, 1944. The concomitant reluctance to recognize support from the two leading capitalist nations, the United States and Great Britain, helps explain Partisan understatement of the amount of Western aid, to the extent that Tito himself was apparently misinformed on the subject.?° A separate American presence in a military mission independent of British control was created only in August, 1944. Partisan leaders, un- aware of the Anglo-American agreement to give British forces primary responsibility in the Balkans, assumed that the United States had little interest in Yugoslavia and that Washington in any case drew its image of developments there from information supplied by the last ambassador of the royal government, Konstantin Fotic, who had remained active in the American capital throughout the war. The following month the American presence in Yugoslavia was seriously compromised in Communist eyes by the arrival of Colonel McDowell’s mission to the Mihailovié forces in Serbia. Intended to evacuate American flyers downed after bombing raids, the American presence was a godsend to the beleaguered Chetnik forces, perceived by them (and the Communists too) as a form of Ameri- can recognition. British recognition of these forces had long since been withdrawn. Winston Churchill quickly protested to President Roosevelt, who admitted on September 3, 1944 that ‘‘the mission of the OSS is my mistake . . . I am directing Donovan to withdraw his mission.’’11 Bad weather delayed withdrawal, rumors spread of American arms supplied to the Chetniks, and the damage was done. The legacy of resentment from this still controversial mission fed further Partisan anger at losing the race for Trieste, with its sizable Yugoslav minority, to Anglo-American forces in April, 1945. The American-backed British race for the port city implicated the United States in long-standing Yugoslav suspicions of British intentions. The American side was initially open to an ethnic division of Trieste but not to Partisan occupation of the entire city. The resulting border dispute would fuel separate Yugoslav suspicions of U.S. intentions, as the strength of American support for the Italian position soon surpassed that of the British. Thus the prospects for postwar Yugoslav-American rela- tions were already bad as World War II came to a close. Confrontation, 1945—-1947 — Josip Broz Tito and the rest of the Communist leadership emerged from the arduous wartime years with new confidence. The seemingly impossible defeat of Nazi Germany had been accomplished; the need for From Confrontation to Emergency Aid 19 Anglo-American military assistance vanished overnight. Consolidation of domestic power now became the primary political task. Massive Partisan forces, grown to more than 500,000 men and women, seemed the best guarantee of victory on this new front, but the prospect of an easy victory was not as clear as hindsight would suggest. Remnants of the leaderless UstaSa regime in Croatia or the Serbian Chetniks of Draza Mihailovié, he himself still at large, could have prolonged the civil war in Yugoslavia for years. In this atmosphere any American or British pres- ence appeared as an obstacle to Communist control. American suspicions of the Communist regime grew just as quickly. The new regime’s harsh treatment of domestic opponents was one source of concern. Its ready assistance to the Greek Communists in that country’s civil war and its enthusiastic approval of the Soviet position on all wider international questions were equally troubling. Aiding the steady deterioration of diplomatic relations throughout 1945 and 1946 were the dispositions of principal representatives on both sides in Belgrade. The American ambassador, Richard C. Patterson, was a private businessman, not a professional diplomat, before his previous assignment to the royal Yugoslav government in exile in London. His intemperate hostility to the Communist regime in Belgrade even ex- tended to advocating, without success in Washington, that the regime be denied American recognition.12 On the other hand, newly appointed Communist officials went out of their way to make life difficult for the American Embassy staff, especially the typically pro-Western local em- ployees. For American diplomats negotiations were arduous or impossi- ble to arrange. Marshall Tito admitted that his young, inexperienced officials, typically in a large city for the first time, were often better suited to fighting than to talking.13 The U.S. Military Mission did not help matters by advertising an exhibit concerning the American media with a Serbo-Croatian title that translated as ‘‘American intelligence services.”’ The nadir in the worsening relations may be fixed in the months following the forcing down of two American C-47 transport planes over Yugoslav territory in August, 1946. U.S. Secretary of State James Byrnes had already clashed that summer with Edvard Kardelj and other Yugoslav representatives over the Trieste issue at the Paris talks concerning a peace treaty. When the second plane crashed with the loss of an entire crew, the acute American sensitivity to even a few deaths prompted predictable U.S. outrage. The Yugoslav side pointed to its repeated previous com- plaints about unannounced overflights by American planes, fighters and bombers included, many of them on clear days, on the route from Austria 20 Yugoslav-American Economic Relations to Italy. The American side replied that the number of alleged overflights was impossibly high and that such overflights were authorized only in case bad weather blocked the regular route. The exact truth of the matter was never Clearly established. In any event Yugoslav anxiety was clearly heightened by continuing Anglo-American control of a small airfield outside of Belgrade for their military missions and the fear that the airfield could serve as a focal point for Western intervention.14 For American officials, on the other hand, continuing deterioration in Soviet- American relations throughout 1946 made developments in Yugoslavia appear all the more ominous. One of these ominous developments was the evolving economic policy of the Communist government, unburdened by 1946 with any effective opposition outside or even inside the People’s Front (Narodni Front), which technically held power. This government aspired to follow the Soviet model so closely that many Americans assumed (incorrectly) that it was also Soviet-directed. Although the new Yugoslav constitution proclaimed on January 31, 1946, omitted the terms ‘““Communist” or ‘Socialist,’ its provisions closely confined the private sector and made state agencies and public property the ‘‘mainstays”’ of the national econ- omy.15 Legislation passed by mid-1946 established a Federal Planning Commission with full powers to prepare a Soviet-style Five-Year Plan. The central government was empowered to control the management and operation of state enterprises down to the smallest detail. By the start of the year, some 70 percent of nonagricultural enterprises had already been nationalized or, in the case of many foreign (including American) firms, temporarily sequestered on charges of wartime collaboration, broadly defined. This was the largest initial base of state-controlled enterprises anywhere in Eastern Europe except for Czechoslovakia. A comprehen- sive nationalization law in December, 1946, was also the area’s earliest. Milovan Djilas’ newspaper article of January 12, 1946, stressed the attrac- tiveness of a Soviet-style economy while speculating that ‘‘our country will develop even more quickly than the USSR,” without perhaps “‘all those stages which the USSR passed through.’’ An American Embassy report cited the article as evidence that ‘‘ Yugoslavia should be considered in an identical category with Russia in any economic or financial plan- ning.’’16 What had been going on in the Yugoslav economy during 1945 and also 1946 was, however, recovery and reconstruction, rather than state investment in heavy industry or comprehensive agricultural collectiviza- tion. While central control was no doubt a manifestation of socialist From Confrontation to Emergency Aid 21 ideology and intent, it also served here to carry out the generally success- ful Yugoslav repair of staggering wartime destruction, which had swept away perhaps 40 percent of the prewar productive capacity and infra- structure. Local initiative and genuine mass enthusiasm were also fac- tors, reinforced by resort to coercion, and the broad base of the Partisan forces and the Communist rank and file were largely responsible for them all.17 Marshall Tito and the rest of the Communist leadership apparently welcomed such un-Soviet local initiatives. They had contributed might- ily to wartime operations and promised to do the same in the enormous task of postwar reconstruction. UNRARA Aid and Yugoslav Reconstruction The pace of Yugosalvia’s reconstruction was in fact triumphantly rapid, particularly when viewed in Balkan perspective. The 1938 levels of national product and industrial output had been virtually restored by 1947, a feat matched only by Bulgaria, which had suffered far less war damage.1® Communist central control and local initiative were only two of the essential elements in this rapid recovery. A third was the vast provision of supplies from the United Nations Relief and Rehabilitation Administration (UNRRA). From the outset in April, 1945, until their termination in June, 1947, UNRRA distributed supplies and services in Yugoslavia which totalled $415.6 million, the largest sum dispensed to any of the European economies and fully one-fifth of the UNRRA aggregate. On an annual basis this figure was four times the value of Yugoslav imports in 1946 and twice the 1938 level. American supplies made up 72 percent of the unrra total, or $298 million. Rather than easing the course of Yugoslav-American relations, however, the administration of UNRRA aid only encouraged mutual suspicion. While searching out the source of these suspicions, we should also take into account the impressive amount of aid and the relatively effective Yugoslav use of it. In addition to food, clothing, and medical supplies, UNRRA aid served to rehabilitate agriculture, transport, and industrial facilities.19 Grain, powdered eggs, milk, and other foodstuffs accounted for some $135 million, clothing and footwear for $82 million, and medical supplies for $120 million. Local Communist competitions between work brigades were instrumental in moving these supplies inland and then to the food- deficit areas of southern Yugoslavia. Agricultural rehabilitation ($36 million) involved the shipment of some livestock but mainly the delivery of some 4,000 tractors. These were typically dispatched to the small 22 Yugoslav-American Economic Relations number of newly organized collective farms, an obvious source of politi- cal friction with the United States. Transport and industrial rehabilita- tion ($143 million) contained their own sources of controversy, partic- ularly American charges that too many supplies were being diverted to the Yugoslav army. Belying these charges was the success of the transport program in jumping port capacity from 15,000 to 200,000 tons a month by the end of 1945. Then came the rebuilding of enough railway track and bridges, combined with enough unrra locomotives (237) and rolling stock, plus river barges and facilities, to restore 90 percent of the network of inland transport facilities (not including roads) by 1946. Road recon- struction and truck deliveries (some 15,000) were also considerable. Industrial aid consisted mainly of coal imports, but it also included mining and milling equipment to reopen the Trepéa lead mines and to put a large number of saw and flour mills back into operation. At the same time, however, other divisive issues kept the Americans from recognizing the Yugoslavs’ relative efficiency and local initiative and also made the Yugoslavs reluctant to ackowledge the American contribution per se. By 1946 the American side was sensitive to substan- tial misuse of UNRRA supplies in neighboring Greece, under the royalist regime opposing the Greek Communist party.2° If American political leverage was insufficient to control the use of UNRRA aid in Greece, imagine American suspicion of this multilateral organization in Commu- nist Yugoslavia. Officially American representatives could find little substantial cause for complaint. It was after all the former New York governor, Herbert Lehman, who, as uNRRa«’s first director general, had decided to appoint a Soviet as the first head of the agency’s Yugoslav mission. Mikhail Sergeichuk, who spoke almost no English, was in fact an able and scrupulous administrator who did not automatically take the Yugoslav side. Some on the American side nonetheless suspected his role. These American officials and several Congressmen also focused on the system of central distribution created by the Yugoslav government’s Supreme Economic Council and its Ministry of Commerce and Supply. They viewed its Reconstruction Fund’s centralized procedures for rationing UNRRA supplies as part of a scheme to nationalize the entire economy. Several U.S. newspapers also suspected the fund of other abuses, such as diverting supplies to the army or to areas strongly supporting the Parti- sans during the war and exporting domestic food supplies that sup- posedly were in severe shortage. The UNRRA’s new director general, another New York politician, Fiorello La Guardia, who had served briefly From Confrontation to Emergency Aid 23 before the war as U.S. Consul in Rijeka (then Fiume under Italy) and was a Serbo-Croatian speaker, dispatched an official U.S. mission to investigate in October, 1946. The mission failed to substantiate any of the serious charges, but some American officials and much of the press remained unconvinced.?1 Yugoslav officials for their part suspected that the Américan UNRRA representatives, about three hundred of them, were covertly attached to the U.S. Military Mission in Belgrade. After all they had entered the country at the same time, in April of 1945, many wearing military uniforms. They often toured the same remote regions as mission mem- bers. These suspicions also appear to have been unfounded, but they undoubtedly contributed to the repeated Yugoslav refusal to acknowl- edge publicly the American origin of most UNRRA supplies.22 Problems with Postwar Loans and Prewar Debts The long-scheduled end of unrRA shipments in June, 1947, ironically marked an end to the continued worsening of economic relations be- tween the two countries. Problems up to that point included more than mutual suspicions over the use and administration of UNRRA aid. Yugoslav desires for American loans to assist recovery, even for the return of prewar Yugoslav gold reserves held in New York, had remained unrequited. So had the official American inquiries about compensation for the assets of nationalized American companies as well as bonds held from the two Blair loans and other prewar Yugoslav borrowings. The American reluctance to provide anything beyond its substantial UNRRA contributions for postwar Yugoslav recovery was of course largely a response to the internal consolidation of Communist power and the external alliance with the Soviet Union, but other less obvious factors also applied. The United States reacted negatively, for example, to the bilateral trade agreements that the Communist government signed with the USSR in April, 1946, and subsequently with a still non-Communist Czechoslovakia. Many American officials, following in the footsteps of wartime Secretary of State Cordell Hull, were deeply convinced that they must oppose all such exclusive bilateral relationships resolutely. They might lead to the reemergence of the autarkic blocs, which the State Department’s Undersecretary for Economic Affairs William Clayton and others were convinced had been the major economic cause of World War II. American faith in the multilateral system of free trade as a stategy for peaceful recovery was perhaps well founded. Yet it was also limited, 24 Yugoslav-American Economic Relations according to recent American scholarship, by a major underestimation of the funds that would be needed, well beyond what unrra aid and strictly commercial credit might provide for the unprecedented task of European reconstruction.?3 This ‘false start’’ preceded the Marshall Plan. It was an approach to recovery based on credits rather than grants and was further restricted by modest lending limits for the purely American Export-Import Bank and also for the multilateral institution created at Bretton Woods in 1944, the International Bank for Reconstruction and Development (1prp). The fears of leading New York bankers that the latter institution might encroach on the market for commercial credit dovetailed with the general reluctance of midwestern and western isolationists in the U.S. Congress to fund international institutions. Even the entirely American Export-Import Bank received an annual lending limit of just $500 million that would endure, as we shall see in Chapter 2, until 1954. Thus the $300 million transport and industrial equipment, which the eminent Yugoslav econo- mist Rudolph Biéanic¢ catalogued in June, 1945, as deserving export credit from the Eximbank, was so large a share of the bank’s total credit capacity as to make it impossible under the best of political circumstances.24 Subsequent Yugoslav inquiries during 1946 about a loan of similar magnitude from the Iprp were also doomed from the start because of the size of the request. By 1946 political relations had become so strained that American officials could offer no encouragement even to the modest Yugoslav request for an Eximbank credit to cover $20 million of raw cotton. It was sought for the following year, when UNRRA supplies would have ceased. The State Department made it clear that internal Yugoslav developments, the military confrontation in the area around Trieste, and the lack of compensation for sequestered American assets all barred the way to even a small loan. Yet American policy preserved some balance toward Yugo- slavia. For example, William Clayton and the new undersecretary of state, Dean Acheson, unequivocally rejected the agrument of Ambassador Patterson in Belgrade that the United States should seek to block the _ delivery of the remaining $102 million in unrra aid to Yugoslavia in August, 1946, after the C-47 incidents. This decision was consistent with Clayton’s earlier refusal in 1945 to withhold unrra oil supplies in order to extract Yugoslav compensation for the sequestering of the Socony- Vacuum oil refinery.2° As in Hungary and Romania, the Socony refinery was the largest American claim. It accounted for most of the $10.4 million in U.S. From Confrontation to Emergency Aid 25 corporate assets located in Yugoslav enterprises in August, 1939. The International Automatic Electric Co. and its telephone network were a distant second. Claims of all U.S. citizens or companies, including Socony, totaled just $11.9 million dollars. The other $35.9 million in total American claims of $47.8 million came from individuals (and their estates or trusts) who were not U.S. citizens.2® The Yugoslav disposition to settle the initial American claim of 1946 was further diminished, apart from any political antagonism, by the preponderance of its own nationals now in exile who were on the list of potential claimants. The principal point of American leverage for settling the compensa- tion issue was the custody of a virtually equivalent sum, $46.8 million, in gold reserves of prewar Yugoslav government. Over twice that amount had been transferred to the Federal Reserve Bank in New York before the German occupation in April, 1941, and then drawn down by the London government in exile during the rest of the war. By August, 1946, the Yugoslav Embassy in Washington was seeking the release of this remain- ing gold through the State Department. The American side explicitly regarded the gold as not being subject to release until the compensation issue had been settled.2”7 The Yugoslav side regarded the two issues separately but instead linked its frustration over the gold’s retention to U.S. tactics toward Yugoslav property or reparations claims in the Ameri- can sector of occupied Germany. These included the American delay in turning over barges that were formerly the property of the river transport service of the prewar Yugoslav state. There were also Yugoslav accusa- tions that American intervention was blocking the German delivery of badly needed machinery and equipment as reparations in kind.2® Agonizing Reappraisals, 1947—1949 — When word of the Tito-Stalin split became public in June, 1948, both the Yugoslav and American sides found themselves with powerful political motives to resolve their economic differences. The reappraisals that followed were indeed agonizing for both sides, to borrow a phrase from John Foster Dulles about Franco-American relations some time later. Almost a year passed before any positive program of American assistance could be generated from Washington or, for that matter, ac- cepted in Belgrade. That difficult process, wherein neither side was prepared to give up fundamental principles, might have taken even longer had not a number of major obstacles to improved relations begun to crumble during the year preceding the split. 26 Yugoslav-American Economic Relations On the U.S. side there was some recognition from the American Embassy in Belgrade that Yugoslav government policy, however much it might be found objectionable on other grounds, was not dictated by Stalin or the numerous Soviet representatives in the country. This accurate perception was to some undetermined extent the result of a change in command at the American Embassy. Richard Patterson was replaced in January, 1947, first by John Moors Cabot as charge d’affaires and then by Cavendish Cannon as ambassador. By June, Cabot was suggesting that the Yugoslavs ‘‘may not always blissfully follow Russian instructions” and that ‘‘there clearly is a difference of opinion in government circles as to the desirability of better relations with the Western powers.” By July, 1947, he speculated that the Yugoslav leaders ‘“‘must eventually be irked at Russian tutelage . . . Yugoslavia intensely resents scolding and lecturing. If we learn this lesson, Russia may some day be forced to also.’’29 On the Yugoslav side close economic ties to the USSR had created some serious problems by mid-1947. The exploitative nature of the two joint Soviet-Yugoslav companies, justa for air and juspap for river transport, was becoming apparent to an increasing number of Yugoslav Communist leaders.?° If the deficiencies of Soviet-style central planning were not yet clear, deliveries of Eastern European and Soviet imports were already falling short of the supplies needed to meet the wildly ambitious Five-Year Plan launched in 1947. The plan proposed to double prewar national income by increasing industrial production fivefold, in part by projecting comparable increases in imported industrial inputs. These targets were hardly compatible with the end of uNrrRa deliveries in the spring of 1947 or with a severe drought that persisted into the summer. The overconfidence that the reconstruction of 1945-46 had encouraged in much of the Yugoslav leadership was now cut short. The notion that rapid industrialization on the Soviet pattern could move ahead as quickly as had the reconstruction stood revealed, at least to some party leaders, as an illusion. They began to talk in terms of reestablishing mineral or even agricultural exports to West European markets in order to _ obtain industrial imports that their Eastern partners were not providing. Interest in some sort of short-term American aid or loan also revived.31 In this atmosphere the Yugoslav authorities sent an invitation in mid-1947 to the Ford Motor Company to open an assembly plant in Rijeka. They also indicated a readiness to resume normal trade relations. Tito himself spoke to the American ambassador about increasing U.S. trade in January, 1948, and most important, the Yugoslav side took the From Confrontation to Emergency Aid 27 initiative in resolving the compensation claims of nationalized American firms. Their first offer in response to the American demand for $47 million was an admittedly unrealistic $2 million, but within a few months, the difference between the two offers had shrunk to $20 million versus $7.5 million. The final agreement on $17 million in July, 1948, just weeks after the Tito-Stalin split, would hardly have been possible with- out the year of serious negotiations that preceded the signing. The same may be said for the simultaneous unblocking of Yugoslav gold held by the Federal Reserve Bank of New York. Discussions between the American bank and the Yugoslav National Bank had begun in mid-1947. In an effort to facilitate a settlement after eleven months of negotiation, the Yugoslav Embassy hired a Washington law firm to expedite matters in April, 1948.32 These gold reserves, reduced to $30 million after the settlement with American firms, now became available to cover Yugoslav imports from the West. Had larger U.S. investment in the interwar period created larger claims, this issue might have remained unresolved. The official American attitude toward economic relations with post- war Europe had meanwhile evolved in a fashion favorable to furnishing aid to Yugoslavia once it had broken with the Soviet Union. Although the demands of reconstruction soon gave way to the imperatives of Cold War with the Soviet Union, U.S. policymakers continued for a time to think in terms of economic assistance rather than direct military support. Thus the Marshall Plan was launched in 1947, two years before the founding of the North Atlantic Treaty Organization. The former’s economic focus may also be found in a majority of the aid given to Greece and Turkey under the famous Truman Doctrine of 1947, which was sweepingly addressed to all countries believed to be threatened by Soviet expansion. The Mutual Defense Assistance Act of 1949 was also applied to Greece and its government’s war against the ongoing Communist insurgency but emphasized the need to establish economic stability there and in other threatened countries.?3 The common denominator, which only the cre- ation of NATO would undercut and the Korean War would end, was that no U.S. troops be committed under any circumstances. This expressed U.S. reluctance to commit troops anywhere helped assuage Yugoslav fears of American intervention and thus prepared the way for their accepting expanded economic relations with the United States. Facilitating the American readiness to do so was the realization by 1947 that the new international, multilateral organizations created at Bretton Woods, such as the 1BRp, could not replace a series of bilateral 28 Yugoslav-American Economic Relations relations with countries needing special, separate treatment. Nor could the American underestimation of European recovery needs continue. This new realism was reflected in the Marshall Plan and in its creation of the multilateral Organization for European Economic Cooperation (OEEc), later the Organization for Economic Cooperation and Development (oEcD). The State Department’s economic chief, William Clayton, argued that the mutilateral character of this American assistance could best be nurtured if it were offered only to Western Europe. East European countries, he argued, would be obliged to export coal, grain, and other primary products to Western Europe in any event if they were to pay for necessary imports of industrial imports. George F. Kennan, the first head of the State Department’s new Policy Planning Staff, maintained on the other hand that the Americans should not ‘‘ourselves draw a line of division through Europe.”’ His argument for inviting East European participation in the Marshall Plan carried the day.34 The Soviet Union refused to allow itself or its Eastern allies to accept such aid. This stricture combined with the strained conditions of Yugo- slavia’s relations with the United States to prevent any significant interest in the European Recovery Program (ERP), as the Marshall Plan came to be known, by either side for the next year. Yugoslavia specifically rejected participation on July 9, 1947, but once the Tito-Stalin split had come into the open, both sides began to weigh seriously the possibility of Yugoslav participation in the Erp. As early as July, 1948, Marshall Tito showed “considerable interest’ in the ERP to a visiting American dignitary, a former governor of California close to the Truman administration. Tito also pressed for a bilateral trade agreement with the United States.35 The reluctance of either side to change concrete policies toward the other would persist well into 1949 and still longer for some key figures in the two governments. American officials, especially outside the State Department, doubted at first that the split with the Soviets was genuine and then that it was permanent. They also pointed to the lack of economic decentralization or political relaxation since the split. Yugoslav leaders were suspicious of ultimate American intentions toward their regime and also leery, on general ideological grounds, of close relations with the major capitalist economy. After trade and aid, could American private investment and all its presumably negative consequences be far behind? The relatively small American presence in the interwar period and, as we shall see, the postwar failure of the American private sector to show much interest in Yugoslavia until the 1960s therefore played a positive role in allaying official Yugoslav suspicions during the 1950s. During the late 1940s, however, the crucial element of American From Confrontation to Emergency Aid 29 policy from the Yugoslav standpoint was the acceptance of a socialist economy under Communist leadership and acknowledgement that no political strings would be attached to any economic aid tendered to it. The American Embassy in Belgrade joined W. Averell Harriman and other high-ranking State Department officials in Washington in urging this approach as early as October, 1948. By January, 1949, Ambassador Cannon argued that Yugoslavia’s increasing economic weakness could not and should not be used, as the British and other Western missions were suggesting, to extract political advantage. Internally Tito was ‘‘in the strongest position of any rebel since Henry the VIIIth,” he argued, and the United States should not abandon a policy of noninterference in domestic Yugoslav affairs. Externally, George Kennan pointed out, the United States should avoid creating the impression of a warm Western embrace of Tito’s regime, which Stalin would surely welcome as propaganda aid in trying to bring it down. Kennan concluded that nothing more than independence and a “cooperative attitude’ would allow the ‘‘normal development of economic relations” with Yugoslavia.?® Emergency Aid, 1949—-1953 — Yugoslav requests for assistance rather than unsolicited American initiatives prompted the provision of large-scale U.S. aid. Aid began slowly in 1949 and reached its peak in 1953. Only in the last part of this period did the Yugoslav leadership turn to reforms that would better connect the domestic economy with Western trade and the market mechanism. In the beginning there was no Yugoslav intention to abandon Soviet-style planning, despite results that were already unsatisfactory before the interruption of economic relations with the Soviet Union and its Eastern European allies. That interruption in the second half of 1948 forced the Yugoslav leadership to seek Western aid in order to replace the imports of industrial inputs, already promised on credit from the East in 1947 but still largely undelivered by mid-1948. They would be needed to fulfill the wildly ambitious industrial targets for the First Five-Year Plan, now increased by 30 percent in 1949. Shortages of such key raw materials as cotton had already threatened to close factories after UNRRA shipments ended in 1947. They recurred in 1949. Food crises followed in 1950 and 1952, partly because of severe droughts, but also because of an ill-fated drive for collectivization and higher forced deliveries, launched in 1949 to show Soviet and other Communist parties that the Yugoslavs were pursuing a Leninist course despite their dispute with Stalin. At the same time a deficit on the current account of Yugoslavia’s 30 Yugoslav-American Economic Relations balance of payments was growing to significant proportions. It threatened to cut off any further access to Western credit. American aid would play a central role in relieving the payments problem. In addition, U.S. prompting for Yugoslav publication of more complete and accurate economic data brought clear, positive results, more so than encourage- ment of Yugoslav economic reform and decentralization. The negotia- tions for American aid were too protracted, the sources too uncertain, and terms too varied to infer some significant correlation between aid and reform, even if the Yugoslav leadership had been open to such influence where its ideological principles were concerned. First, however, came Yugoslav efforts to expand trade without credit or aid. By September, 1948, the Yugoslav Embassy in Washington was approaching three private American companies concerning the purchase of oil rigs and other drilling equipment. The initial Washington response to granting the necessary export licenses was negative, on grounds that this technology might be passed on to the USSR. The recent Yugoslav support for the Soviet position at the Danube Conference on navigation rights reinforced support for this view. From the outset, however, the American Embassy in Belgrade argued for granting the licenses. By February, 1949, just as the comprehensive American restrictions on strategic exports to Eastern Europe went into effect, the Department of Commerce approved the sale of rigs and other oil equipment approaching $15 million. The approval followed by two months Tito’s specific prom- ise in December, 1948, to export the equivalent value of copper and lead to the United States.37 This amount probably exhausted immediately the Yugoslav capacity for covering essential imports with its own resources. Total Yugoslav exports to the United States did indeed rise from $8 million in 1948 to $17 million in 1949. Imports rose even more, from $11 million to $31 million, thus boosting the bilateral trade deficit to $14 million (see Table 2.2). The only major request for an export license to Yugoslavia at this time was for a much smaller amount, but the project was controversial. In September, 1949, the Yugoslav Embassy in Washington renewed its license application, already rejected once in the summer of 1948, for purchase as a turnkey project of a $3.2 million American mill for steel production. The U.S. Secretary of Defense, Louis Johnson, appointed by President Truman as a concession to the conservative China lobby, was firmly opposed to this sale. He cited as grounds, spelled out in the new legislation for export control, that these products and their technology had direct military applications. After repeated exchanges Secretary of From Confrontation to Emergency Aid 31 State Dean Acheson and Ambassador Cannon prevailed over Johnson, who was by this time on his way out of the Truman administration. Their arguments for approval stressed not only the minimum military useful- ness of this sort of intermediate steel but also the need to reward Yugoslavia for its courage in stepping outside the Soviet bloc. When President Truman appointed a new ambassador to Yugoslavia in December, 1949, he reached high into the ranks of the State Department by naming Assistant Secretary George V. Allen. Truman used the an- nouncement of the appointment to speak in terms of military as well as economic aid for Yugoslavia. Yugoslav officials would come to regard the arrival of George Allen as the starting point for predictably constructive relations with the United States in general and with the American Embassy in particular. Allen’s first meeting with Tito in January lasted longer and went better than either side had expected. Many more would follow. At his first meeting with Foreign Minister Edvard Kardelj in February, Allen was presented with a persuasive case for aid to Yugoslav economy trying to trade with the West but without any of the promised Western loans.38 Eximbank Credits and Raw-Material Imports Transforming such political capital into borrower’s collateral was not an automatic or easy process. The Yugoslav pursuit of $25 million worth of export credits from the U.S. Export-Import Bank in Washington began in May, 1949. The quest was eventually rewarded. The bank initially re- jected a Yugoslav request to finance the purchase of raw cotton because it deemed the country’s potential for textile exports too limited to support repayment of the hard-currency loan. A renewed request in late August was adroitly accompanied by final Yugoslav dissolution of the joint air and river transport companies that had been set up with the USSR in 1946. A $20 million credit was granted to Yugoslavia in September, 1949, at 3.5 percent interest over seven years and with no payments until 1954, but not for cotton. This credit was granted for capital equipment or raw materials to rehabilitate nonferrous mines or other export industries. It was not until March, 1950, that a second Eximbank credit of $20 million was authorized to include cotton and other raw materials desper- ately needed for consumer goods. State Department representatives from Washington had favored cotton credits from the start because that com- modity was part of the American agricultural surplus. Its low price promised a large quantity for the sum of available credit, and it was also of 32 Yugoslav-American Economic Relations low strategic significance. The Eximbank was consistently the State Department’s favored source for such assistance rather than an IBRD loan, participation in the Erp, or a direct congressional grant. Any of these alternatives, it was believed in Washington, would be likely to take even longer for approval.?9 Raw cotton dispatched in 1950 was delayed in arriving and was then quickly consumed. By early 1951 Yugoslav textile mills and shoe facto- ries were facing closure within a few weeks unless more materials were provided.*° Rising world prices for timber and nonferrous metals, the major Yugoslav exports, were not enough to offset the still higher prices for cotton, coke, tinplate, and other crucial imports. The food crises of 1950 and 1952 drove home the realization that any significant Yugoslav agricultural exports were out of the question for the time being, and as it turned out, for years to come. Food Relief in 1950 The drought of 1950 only aggravated problems of agricultural procure- ment which were created by belated collectivization and, perhaps more important, by the continued imposition of forced deliveries at minimal prices on a smallholding peasantry, which still held a majority of the country’s arable land. By the fall of 1950, the shortfall in wheat and corn harvests had not only stopped all grain exports but prompted an increase in the slaughtering of livestock and a 10 percent cut in the urban bread ration. Winter was fast approaching, with the prospect of starvation in some areas. The Yugoslav government requested emergency food aid of $50 million from the United States in early October. Ambassador Allen underscored the urgency of the request by personally traveling to the stricken areas. He took home movies of faces as well as fields and showed these films to key members of Congress on a hastily arranged trip to Washington. Within barely one month, during a special December ses- sion of the Eighty-first Congress called by President Truman for this piece _of legislation and one other, the administration and the Congress had reached argeement on the terms of Yugoslav Emergency Relief Act. It provided up to $50 million in relief, of which some $31 million worth of ten types of foodstuffs would reach Yugoslavia before or shortly after the end of the year. Another $38 million would be provided later in 1951, under the Marshall Plan provisons of the Economic Cooperation Admin- istration. From Confrontation to Emergency Aid 33 How to deliver the first, crucial segment as soon as possible, even if initial congressional approval were delayed or denied? Secretary of State Dean Acheson had already warned that direct aid to Yugoslavia would have trouble winning support in a Congress ‘“‘where Communists be- longed to a genus without subspecies.”’ (While the Senate would approve the package 60 votes to 21 on December 11, the House vote on December 13 was closer, 225 to 145.) By mid-October the Truman administration and the State Department had turned first to Eximbank, then to the Eca and the Mutual Defense Assistance Program (mpap).*! Set up outside the State Department to administer the Marshall Plan, or European Recovery Program, the Eca fortunately had some discretion to lend limited supplies already in Western Europe to countries not members of the program. The United States could then replenish the Eca stocks at a later date. Ameri- can officials agreed with Marshall Tito that it would raise too many sensitive issues for Yugoslavia to join the European Recovery Program. The same argument was initially raised against Yugoslav receipt of nominally military aid from the mpap, but it was then set aside when Secretary Acheson, citing his own legal background and encouraged by the department’s legal advisor, Adrian Fisher, declared the aid accept- able. It was agreed that food supplies could be transferred quickly and without political risk from U.S. forces in Germany to the Yugoslav army. President Truman used his authority to shift up to 10 percent of MpDAP funds without congressional approval. This relieved pressure on the country’s civilian food supply and complied with the legal stipulations of the American program but did not provide U.S. arms at a time when neither side desired an arms deal. The first shipload of American foodstuffs reached the port of Rijeka on November 18, 1950, several days before a formal agreement between the two governments had been signed. By the time that the last of these stop-gap shipments arrived in March, 1951, some 249,000 metric tons of supplies, worth $31.8 million including transportation, were delivered to Yugoslavia. The Eximbank financed the shipment of 34,000 tons of beans, lard, dried eggs, and canned meat worth $5.2 million. The military mpa program furnished a much larger amount, 105,000 tons worth $12.4 million, consisting mainly of corn, barley, sugar, and flour, as eventually did the Eca, with 110,000 tons of wheat flour valued at $10.6 million. The subsequent congressional authorization provided another 280,000 tons of foodstuffs, worth $37.8 million, during the course of 1951, over half of which was corn, oats, and dried peas. Private carE shipments from the United States, supported with some surplus foods donated by the Depart- 34 Yugoslav-American Economic Relations ment of Agriculture, provided another 23,000 tons of butter, dried eggs, and milk worth $18 million. United States’ church organizations, with the Catholic relief agency conspicuously absent because of the conviction of Archbishop Stepinac for alleged collaboration with German occupa- tion forces, contributed $9 million worth of foodstuffs. The grand total came to 600,000 tons, worth $96.9 million.42 For Yugoslav-American economic relations, this emergency aid and the more formal Eca program following the drought of 1952 were land- marks in several significant ways. Aid arrived in a hurry, despite a worldwide shortage of ship transport at the time. Yugoslav authorities learned that the American government was capable of responding quickly in an emergency, more quickly than it would respond again until the Skopje earthquake of 1963. The wheat flour provided by Eca came directly from stocks in Italy and West Germany, to be replaced later by deliveries to those countries from the United States. Its cost was charged to the congressional appropriation for the subsequent year, but its deliv- ery was made under the stop-gap program. Here was an auspicious link to Western Europe for Yugoslavia. Separate British, French, and Norwegian donations exceeding $15 million added to this impression. West Ger- many extended a $35 million credit for capital equipment. The Yugoslav side also appreciated the small number of U.S. observers, fewer than fifteen, dispatched to monitor a program that was clearly under Yugoslav control. American acceptance of the rationing system as equitable was especially welcome. Only a few years earlier the interest of UNRRA ob- servers in monitoring that system closely had struck Communist officials as outside interference.** The new ECA economic mission within the American Embassy, headed by Richard Allen, appreciated for its part the easy access that was afforded to these current observers to all regions of the country and to high-ranking Yugoslav officials in Belgrade for ongoing negotiations. Most important to the American side, particularly to interested congress- men, was the favorable publicity given these shipments by their promi- nent ‘“‘USA”’ labeling and by full coverage in the Yugoslav press and radio. _ The Belgrade press and Zagreb radio, for instance, acknowledged the U.S. aid more than once a day during January, 1950. Macedonian radio went so far as to announce the date and amount of American supplies distrib- uted.44 The Yugoslav obligation to use the proceeds of food sales for the relief effort set a small precedent in accounting for U.S. dispensations to Yugoslavia which would grow under the program of American food sales From Confrontation to Emergency Aid 35 for dinars later in the 1950s. The much more important precedent established during the American provision of food relief during 1950—51 was that each side could now trust the other to honor the terms of a joint agreement that brought significant American aid to Yugoslavia. By No- vember, 1951, a permanent ECA economic mission to Yugoslavia had been dispatched to the American Embassy in Belgrade under the terms of the new Mutual Security Act. There were also informal discussions of Yugoslav membership in the o£Ec or the European Payments Union. Neither ever materialized, but the mere entertainment of these prospects testified to the face-to-face understanding that had grown up in the few years since 1947. The Yugoslav need to avoid even the appearance of an alliance with the West still militated against such visible connections; it was the American acceptance of an independent, socialist Yugoslavia under Communist leadership which made these connections even con- ceivable to both sides. By 1952 a broader framework, which included Britain and France but not the institutions of the Western alliance, was therefore in place to deal with a second food crisis. Coming to Terms with the IBRD and the IMF The promotion of long-term Yugoslav development would prove a more difficult task for the two countries than the solution to short-term crises, an area in which both national traditions excelled. The goal of modern economic development was easy to agree upon. The American preoc- cupation with free, multilateral trade as the solution to all of Europe’s postwar economic problems had quickly shed its related desire to sup- press all state or socialist initiatives. By the time of the Marshall Plan and ECA, U.S. policy had adopted the Keynesian view that prudent investment from whatever source was the best stimulus to growth of exports, prefera- bly manufactured, as well as of national product.45 The ‘‘politics of productivity” thus placed economic growth ahead of any particular social system and permitted rapprochement with socialist Yugoslavia, but the U.S. Congress was not yet diposed, as it would be briefly in the late 1950s, to lend funds for long-term development to Yugoslavia directly. That left the 1srp and, indirectly, the mr as the principal sources of Western support. The United States was of course the largest single contributor to the capital of both organizations, although constrained to a maximum of 25 percent of the voting rights. The head of the 1srp was from the start an American, but none of the representatives of the few Western countries that dominated the bank wished to lend its small initial funding 36 Yugoslav-American Economic Relations (less than $2 billion) on other than “hard” commercial terms. Calculated in such terms, too many key Yugoslav investment projects did not prom- ise enough profitability, let alone export earnings, to attract the large- scale loans that the country badly needed. The mF was not of course in the development loan business and could offer only small-scale credits for exchange stabilization. The extent of its assistance was a $3 million loan to Yugoslavia, secured by its gold reserves, in October, 1949, to establish an official exchange rate for the dinar (50 = $1) and another $6 million in late 1951 for the devaluation of the dinar to 300 = $1, hopefully to bring domestic and foreign prices into better balance. A complex system of multiple exchange rates quickly emerged, however, vitiating these hopes and barring the way to further IMF credits. The first mF loan did open the way, however, for favorable considera- tion of Yugoslavia by the 1prp. The initial Yugoslav proposal to the 1mrp sought a huge, general loan of $200 million but also included a small, specific request appropriately tied to increasing the capacity for future export earnings. In October, 1949, the bank had extended a token loan of $2.7 million to Yugoslavia and dispatched the first of many missions to Belgrade to work ona larger one. The Yugoslavs sought a $25 million loan to purchase mining equipment for zinc, lead, and magnesite, traditionally major exports. Some $12 million worth of the equipment was to come from dollar purchases in the United States, with the rest divided among Britain, France, Italy, Belgium, and the Netherlands. Official American support derived specifically from the National Security Council’s posi- tion paper on the Yugoslav-Soviet conflict, #18/4, dated November 17, 1949.76 Yet this modest loan would not be approved until almost two years had passed. By 1951 the still more modest initial loan of $2.7 million had been repaid. A major obstacle remained. Yugoslavia owed $50 million to prewar American bondholders and a substantial amount to French bond- holders as well. Some prospect of settlement was a prerequisite to an IBRD loan. The Yugoslavs acknowledged this link and invited the president of . the U.S. Foreign Bondholders Council, James G. Rogers, to Belgrade in March, 1950. Their talks were cordial, but Rogers refused the Yugoslav request to reduce the principal sum. Yugoslav assurances that $5.5 mil- lion a year would be set aside to cover all claims encouraged the bank’s approval of a nondollar loan of $28 million by October, 1951, and a comparable loan of $30 million in February, 1953.47 Even these loans would not have been granted, as we shall see, without the much larger From Confrontation to Emergency Aid 37 official assistance forthcoming in 1952—53 from the United States, Great Britain, and France. No more 1prp loans would be extended to Yugoslavia until after a final settlement was actually signed with the Bondholders Council in August, 1959. All of this hardly boded well for the pending Yugoslav request of a much larger, and much less export-oriented, loan of $200 million or more. By the crisis year of 1950, the Yugoslav request had grown to $400 million spread over two years. It sought new equipment for steel, petroleum, electric power, and aluminum production. Only the last promised signifi- cant export earnings. The loan faced further obstacles, beyond the Ameri- can bondholder’s opposition and the difficulties over its size and pur- pose. The two principal negotiators found it hard to work together, and the American side lacked precise information on the Yugoslav economy. The new Yugoslav ambassador to Washington, Vladimir Popovic, was still committed to a preference for heavy industry over export earnings. His own party background did not dispose him to tailoring Yugoslav requests to the requirements of Western institutions. He spoke no En- glish, in contrast to his predecessor, Sava Kosanovic, the first Yugoslav ambassador in postwar Washington, who was already in the United States during the war years and had cultivated a wide range of important contacts. Newcomer Popovic found the balance of forces competing for power in Washington difficult to understand. He assumed incor- rectly that Yugoslav requests to the 1srD would be “automatically ap- proved” simply because of the American government’s political interest in them. In contrast, the American president of the 1srp, Eugene Black, brought along with him the background of a Wall Street banker who initially saw a country’s capacity for debt service as a major criterion in granting it a loan. Black’s strong opposition to the full Yugoslav request surfaced during his trip to Belgrade in September, 1950. Ambassador Popovic found Black’s demands for information totally unacceptable and raised the prospect of acomplete Yugoslav break with the West as a result. In fact, Black’s four-hour meeting with Marshall Tito went more smoothly than Popovic had presumed and Black had expected. The Yugoslav leader’s broad perspective, disarming frankness, and negotiating skills never failed to impress American visitors. Tito admitted that the rationale for going ahead with steel production was political, to keep a pledge whose forfeiture the Soviets and their sympathizers would seize upon. Black replied that Yugoslav requests in other branches of production would nonetheless receive a fair hearing, with a reasonable prospect for 38 Yugoslav-American Economic Relations loans of $200 million spread over four years if supporting data were sufficient.48 Enter again the data problem, which had already interfered with Yugoslav loan applications to the Eximbank as well as the 1prp. In order to project a borrowing country’s capacity for repayment, these essentially financial institutions needed complete and accurate statistics on its overall economic performance, national income, and international ac- counts. This information had never been fully collected in Yugoslavia. Before the war and during the immediate postwar period, it had been held as highly classified information. Abandoning this secretive policy and suspicious mentality was more difficult for the Yugoslav side than most American obsevers realized. Repeated American requests for more pre- cise information on imports and investment especially were frustrated until the early 1950s. Ambassador Allen nonetheless cautioned against any proposal for sending in a team of American experts to reshape the statistical services. That, he rightly argued, they would want and need to do for themselves.42 More explicit national accounts were indeed fur- nished by late 1950, but full figures on investments and imports remained unavailable. Thus the application for a large-scale loan from the 1rp that was so badly needed by the Yugoslav government could not receive a complete hearing until 1951. The Balance of Payments Deficit, Tripartite Aid, and the 1952 Food Crisis The delay of the inrp in extending anticipated loans to Yugoslavia during 1950 left the U.S. government with no recourse for 1951 but to step directly into the breach. Emergency food deliveries had set the precedent. Now the shortage of crucial imports of industrial raw materials once again came to the fore, joined this time by a growing deficit in the Yugoslav balance of payments on current account (i.e., a shortfall in the export of goods and services to cover imports). American observers had repeatedly underestimated the size of this deficit, continuing to expect through 1950 that the two Eximbank loans would fill the gap. During 1951, the deficit grew to $205 million, a sum that exceeded current account earnings by 94 percent. The $28 million first installment of the long-awaited loan from the 1prp covered only a small fraction of the deficit; grants covered most of the rest. Private CARE donations from the United States provided a small fraction of the grant portion. The overwhelming majority came from the Tripartite agreement for eighteen months of support for Yugoslavia which the United States had negotiated during the spring of 1951 with From Confrontation to Emergency Aid 39 Great Britain and France. While no Yugoslav representative attended these negotiations, the agreement had its origins in discussions between Ambassador Allen and several Yugoslav representatives, especially Leo Mates. Fully $120 million was furnished Yugoslavia for 1952. The Ameri- can contribution was $78 million, or 65 percent of the total, only slightly less than the 73 percent share of UNRRA aid given by the United States a few years before, with Britain and France pledging $27.6 and $14.4 million or 23 and 12 percent, respectively.°° This coordinated arrangement endured through 1953. That year it amounted to $99 million, with the United States again providing $78 million. The arrangement served several useful purposes, besides lessen- ing the American burden. It discouraged piecemeal Yugoslav requests for small sums on short notice, needed ‘‘yesterday,” as more than one American official observed. It encouraged the 1srp to view a Yugoslav loan more favorably. A bank representative, Martin Rosen, had attended the London negotiations in 1951 to express the 1prp’s interest in official aid that would be sufficient to cover the Yugoslav deficit on current account. Only such coverage would make Yugoslavia’s capacity to repay the aforementioned 1prp loans of late 1951 and 1952 appear credible. The British and French commitments were also a useful device for the U.S. government to use in holding the Congress to continued provision of the American share. The U.S. Mutual Security Act of 1951 made congressional funding possible through the existing ECA mechanism. That mechanism relied heavily on procuring available supplies from Western European sources in lieu of cash payments. Tripartite arrangements drew at least two of those governments directly into the decision-making process. For the Tito government, the arrangement also served to show the Soviet Union that Yugoslavia had access to broad Western support for its indepen- dence. There were drawbacks to the agreement as well. Negotiations with the British and French governments took time. With London, Washington had not only to struggle to extract scarce British resources but was also concerned to avoid any appearance of being ‘‘tied to the British kite,” in Ambassador Allen’s phrase. This perception might revive wartime Yugoslav suspicions of a secret Western agenda in the Balkans. French reluctance to contribute derived from their economy’s own problems and from the April 1951 settlement for French holders of Yugoslav bonds and stocks for $15 million over ten to twelve years. This was seen from Paris as a generous agreement that had forfeited 90 percent of what was actually 40 Yugoslav-American Economic Relations owed and therefore constituted aid in its own right.5! Foreign Minister Couve de Murville had in 1950 already voiced his government’s hesita- tion to contribute to the build-up in Yugoslavia’s armed forces. His view as described by the American ambassador in Paris, David Bruce, was ‘“‘a tank for Yugoslavia means one less tank for the others (read France).’’>2 The perceived threat of a Soviet-led military attack on Yugoslavia reached its peak in 1951. Border incidents exceeded 1,000. Yugoslavia’s troop strength was increased from 450,000 to 600,000. The need to sup- port those forces added further to the demand of Western resources. Within barely one month of a Yugoslav request for raw materials for the army, President Truman had again used his executive authority over 10 percent of the mpap funds to grant Yugoslavia $29 million in needed supplies. On June 28 President Tito presented a formal request for military aid to Ambassador Allen. This led to the establishment of an American military mission (MAAG) in Yugoslavia the following year. At Yugoslav insistence the MAAG remained under the authority of the Ameri- can ambassador. Under terms crafted to avoid both congressional and Soviet criticism, the Military Assistance Program expended $296 million in Yugoslavia by mid-1953 but transferred only an additional $14 million in excess military hardware (see Table 3.2). For the years 1952—53 the major event in the short-term economic relations between the two countries was not U.S. military support but rather the return of drought conditions in the summer of 1952, with a severe impact on the grain harvest. In 1950 wheat and corn yields had amounted to 49 and 65 percent respectively of physical averages for 1930-39. In 1952 they were 35 and 70 percent, with overall crop produc- tion at 57 percent of the prewar average. Net food imports accounted for 36 percent of a freshly swollen trade deficit, compared to 41 percent in 1951.53 The virtual end of collectivization by this time may have contrib- uted to the slightly smaller requirements for imports. The American policy of ‘‘keeping Tito afloat” dictated that this gap be filled as quickly as possible. The existence of American aid and an American military mission in the country made it possible to divert funds for Yugoslav food relief under the terms of the Mutual Security Act. The State Department argued that drastic shortages could lead to unemployment and civil unrest, which could jeopardize the country’s independence by inviting Soviet intervention. Maintaining the military capacity for self-defense, more than any humanitarian motive or signal of political approval, provided the explicit justification for funneling $31 million of emer- gency food supplies into the country from European sources and Amer- From Confrontation to Emergency Aid 41 ican surplus stocks.54 This assistance fell short of the $49 million re- quested by the Yugoslav side and cut somewhat into the supply of industrial raw materials. It did not detract, however, from the renewed Tripartite program’s success in covering most of the Yugoslav payments deficit on current account. The deficit ballooned to two and a half times export earnings in 1953, a record postwar disparity. It was in this context that American grants totaling $122 million under the msa and Tripartite arrangements furnished 31 percent of Yugoslav import value for 1953, both highwater marks, as seen in Tables 2.1 and 2.2. Yugoslav exports to the United States amounted to only $26 million, compared to $234 million worth of goods imported from the United States. The dilemma of dealing with a serious Table 2.1. U.S. Economic Aid? and Yugoslavia’s Current Account Balance, 1948-1961» (in millions of dollars) Trade Deficit (Of which: (Of which: Current (Exports- U.S. Food Net U.S. Econ. Account Year Imports) Loans) Transfers Grants) Balance 1948 == 5) — 14 — = 37 1949 —140 — 36 — = (hs 1950 —124 — Of, — = (By 1951 —248 _ 217 ( 81) =A 1952 —144 — 123 (106) = il 1953 —229 —_— 164 (123) = (or! 1954 —120 — 115 ( 68) + 4 1955 — 205 (48) 142 (106) = 86 1956 — 166 (68) 126 ( 24) ap 1957 27 (84) 106 ( 34) —108 1958 — 236 (65) 95 ((33)} — 88 1959 = \7/ (85) 90 ( 32) = 7) 1960 —269 (17) 90 ( 18) = 122 1961 —346 (26) 69 ( 18) oly, sources: Savezni zavod za statistiku, Razvoj Jugoslavije, 1947-1981 [The Development of Yugoslavia, 1947-1981], (Belgrade, 1982), p. 124. aGrants or dinar-repayable loans only, excluding pir or Eximbank loans, for which see Tables 3.1 and 5.1. Also see Table 3.1 for breakdown of all U.S. Economic loans and grants. bFiscal years, July 1—June 30. 42 Yugoslav-American Economic Relations Table 2.2. U.S. Shares of Yugoslav Exports and Imports, 1947-1961 (in millions of dollars) Agricultural Goods as As Percent As Percent Percent of Yugoslav of Total Yugoslav of Total Yugoslav Exports Yugoslav Imports Yugoslav Imports Year to U.S. Exports from U.S. Imports from U.S. 1947 3.0 gill Hf 4 — 1948 8 2.6 11 3.4 — 1949 AUT 8.4 31 10.3 — 1950 Pan legs) 1350 49 20.6 — 1951 2 14.6 146.6 a3 —_— 1952 36 14.7 72 19.3 — 1953 26 14.0 136 34.4 bae2 1954 23 95 95 Page SS) 5o35 1955 28 10.8 144 32.7 64.9 1956 27 8.5 129 Zee 66.6 1957 33.4 8.5 174 26.3 68.3 1958 33 tfc) 134 19.6 66.4 1959 31 6.5 140 20.4 68.7 1960 39 6.8 88.5 10.7 30.2 1961 37 6.4 181 19.9 42.8 source: Savezni zavod za statistiku, Statisticki godignjak SFR] [Statistical Yearbook of Yugosla- via] (Belgrade, 1954, 1959, 1960, 1965). Yugoslav payments deficit would of course return again a number of times, but never again would American policymakers be able to address the problem in such direct fashion. The second Tripartite conference, held in Washington from February to April, 1952, agreed that Yugoslavia should seek no further international credits without prior Tripartite consultation. Tito’s govenment grudgingly accepted this stipulation in writing. It also agreed, more readily, to a set of seven guidelines for reducing investment in ‘key projects’ but insisted on inserting the qualification ‘“‘where appropriate”’ to all but two of them.5® Yugoslavia’s long-term relations with the United States and other market economies were less affected during the early 1950s by attention to these investment guidelines than by the earliest beginnings of eco- From Confrontation to Emergency Aid 43 nomic reform (i.e., the creation of quasi-independent business enter- prises and the reduction of central administration of the economy). Future problems with international payments would have to be tackled within a new context, that of ‘‘workers’ self-management” and market socialism, toward which the Yugoslav economy now began to turn. The turn, as Chapter 4 makes clear, was slow and difficult, falling short even after several decades of creating a true market economy. Efforts to estab- lish market relations went much slower than the decentralization of economic authority from the federal to the republic or local levels. The initial experience of private American companies with such local author- ities was not promising. Two initial steps toward market socialism were taken in 1950. The huge central planning ministry was greatly reduced and a number of other ministries abolished, and the enterprises’ fledgling workers’ councils were legally made the country’s primary economic institution. The ideological basis of these decisions was fundamental for Marshall Tito and the party leadership. At the same time the decisions also reflected the immediate practical need to find something better than the centralized, bureaucratic Soviet system to deal with the crisis conditions that Yugo- slavia’s isolation and ambitious plans for economic development had created even before the drought of 1950. The major effect of the 1950 reforms was to transfer the functions of the abolished federal ministries to comparable organs at the republic level. Such tactics would, according to the leading economic official, Boris Kidri¢, at least offer some relief to centralized strangulation while a broader reorganization was being prepared. During 1951—52 several further measures were taken in an attempt to introduce market norms for more rational allocation of resources. The first postwar devaluation, from 50 to 300 dinars to the dollar, created a more realistic exchange rate. This devaluation also set a precedent for following mr guidelines, in return for the $9 million credit received to cushion the adjustment. This could be done because prices of raw and semi-finished industrial materials were increased fourfold in late 1951, reducing if not eliminating their artificial underpricing. In agriculture collectivization and compulsory deliveries were virtually abandoned by 1952. Rationing and a coupon system of exchange were eliminated, and the practice of multiple pricing greatly reduced. Foreign trade enterprises were allowed to retain 45 percent of their export earnings in the form of foreign exchange. A complex system of export and import coefficients (in effect a 44 Yugoslav-American Economic Relations system of multiple exchange rates) was nontheless retained to differenti- ate between domestic and international prices, thereby undercutting the devaluation of the dinar. Budgetary authority, moreover, was less re- duced than decentralized to the republic or local levels. In the process some five thousand officials were also transferred to lower administrative levels.5© Further liberalization of trade and production would, according to the head of the U.S. economic mission in Belgrade, Richard Allen, require the continuation of large-scale foreign aid for some time unless invest- ment and military expenditures were drastically reduced.®” Investment came down very slowly from a high of 34 percent of net national product in 1952-53, staying above 30 percent of net national product for the rest of the decade. Four-fifths of these investment outlays for the 1950—53 period were devoted to so-called “‘key projects.”” They survived the scaling back of the initial Five-Year Plan and the loss of Eastern European trade and credit. These projects ironically were concentrated in the very areas of heavy industry against which 1prp officials had argued. Consumer goods and other light industry were neglected. For the Yugoslav side, however, such projects seemed the only way to cover defense needs while also accelerating the slow growth of net material product, 2.3 percent a year, recorded for 1947-52. Yet those years had also seen industrial investment rise by 16 percent annually, and foreign aid, principally from the United States, account for fully 73.5 percent of that figure. Foreign aid also covered 88 percent of the current account deficits that resulted primarily from the industrially related imports so crucial to this extensive invest- ment.°® The fact that foreign credit covered just 12 percent of those deficits suggests that major adjustments still lay ahead for the Yugoslav economy if its development were to be advanced in the absence of massive foreign aid. Access for Yugoslav exports to the American market, and hence to American commerical credit, remained limited throughout this first postwar decade. As we have seen, the Yugoslav side showed some interest by 1947 in exporting nonferrous ores and agricultural products to the United States. The former attracted some official American interest in those strategic minerals that were in short Western supply. Sales to the United States, however, were a tiny share of total Yugoslav exports until after the Tito-Stalin split and never exceeded 15 percent even during the early 1950s (see Table 2.2 above). Agricultural exports were of course out of the question during the post-drought years of 1951 and 1953. Nonfer- rous ores were still the major source of sales. They were also the major From Confrontation to Emergency Aid 45 source of commercial credit from American banks. As early as March, 1949, the Bank of America was approached for a loan of $20 million and the Chase Manhattan Bank for one of $40 million. Both loans were intended to purchase mining equipment, with Yugoslav ore exports and gold reserves offered as security. Since the two American banks would only accept gold held outside Yugoslavia as security for loans of this size, the loans were not in fact made. The Chase Manhattan Bank eventually provided $5 million worth of credit in 1951, but only for ninety days at 4 percent interest and in return for exclusive rights to sell Yugoslav exports in the United States.59 These unattractive terms may explain why the Yugoslav National Bank did not draw upon this credit unit] 1952. Yugoslav problems in selling to the American market went beyond the difficulties of obtaining commercial credit from New York banks. Such credit would be proffered in later years, all too readily during the 1970s. Three other early obstacles have persisted in some form and are worth noting at the conclusion of this chapter. First was the disparity between American and Yugoslav attitudes toward direct U.S. investment in production for Western markets. Evi- dence of American interest may be found as early as 1949. Representa- tives of both Singer Sewing Machines and International Business Ma- chines (18M) made inquiries about starting Yugoslav operations. Nothing came of these or other early inquiries, in part because even multinational American firms were slow to commit themselves to any European ven- tures for the first postwar decade, and also because there was no legal framework yet in place for foreign investment in socialist Yugoslavia. Yugoslavia’s Communist leadership also had strong ideological res- ervations about such investment. Svetozar Vukmanovi¢-Tempo, then president of the Economic Council, had by 1952 apparently come around to favor some foreign investment. At that early date Tempo was willing to invite a private U.S. firm to participate in the Majdanpek copper mining project on the pragmatic grounds that the prospects for long-term invest- ment funds from the U.S. government were diminishing and that Ameri- can technicians in Yugoslavia for the aid program had behaved responsi- bly. Boris Kidrié¢, still the ranking economic official, remained opposed.®° This genuine dilemma for any socialist state surfaced again, as we shall see, in debates over the joint venture law of 1967 and its subsequent amendments. The prospects for private U.S. investment were already facing two additional obstacles by the early 1950s. One was bureaucratic; a decen- tralized but still bureaucratic framework of economic administration in 46 Yugoslav-American Economic Relations Yugoslavia hampered decision making and discouraged innovation. The other was economic; potential Yugoslav partners were more strongly attracted to the large, easy domestic market than to the difficult Western market. Let a specific case illustrate each general problem. An English representative of Shell Oil, its prewar manager for Yugo- slavia, spent 1952-53 in Zagreb trying to reestablish operations. He failed, not because of ideological hostility, but because decentralization required that contracts be negotiated with enterprises in each republic, under varying rules with individuals of varying skills. Some republics reportedly sought advantages over others. American representatives of U.S. firms reported similar trials. For this reason Socony-Vacuum, aban- doned its interest in appointing an agent in Yugoslavia.®? Decentralization also contributed to the ‘‘sorrowful saga of the choco- late Santa Claus,’’ as an American Embassy report described it in 1953.62 The Josef Kras chocolate factory of Zagreb, founded before World War I and now a nationalized enterprise, had been drawn into the production of chocolate figures for the American holiday seasons by an American entrepreneur of German-Hungarian origin. On the basis of his prewar experience in selling Czech novelty chocolates to the United States, he persuaded the KraS management in 1952 to step into the opening in the American market created by the postwar absence of such imports from Czechoslovakia. After a promising start the venture soon foundered. The condescending attitude of the American entrepreneur did not help. Neither did the powerlessness of trade officials in Belgrade to remove a particular Kras’ manager who opposed modest investment in new equip- ment that would make possible the mass production required for the American market. Most damaging, however, was the simple fact that the Krag enterprise made a significantly smaller profit on its initial exports to the United States than it did on much less demanding sales in a domestic market of some 17 million. An increasing population and then rising prices (uncompensated by exchange-rate adjustments) made that domestic market even more attrac- tive to Yugoslav enterprises in subsequent decades. Exports to Western markets, particularly to the United States, would again suffer accord- ingly. Soft Loans and Hard Bargaining: Official Relations, 1954—1 964 qummes | he foreign economic relations of both Yugoslavia and the United States broadened significantly during the second postwar decade. For that reason alone commercial relations between the two countries began to reflect long-term directions in their general economic policies, as well as the immediate influence of specifically bilateral political issues. Nevertheless, from the early years of the Eisenhower administra- tion through the transition from John Kennedy’s brief presidency to the Johnson administration, this official relationship followed a cyclical pattern that has endured to the present time. Cooperation and useful relations have been punctuated by periods of conflict or misunderstand- ing, always stopping short of either confrontation on the early postwar pattern or the sort of Yugoslav reliance on massive American aid that the emergency conditions of the early 1950s demanded. As early as 1953, the peak year for such assistance, U.S. Ambassador George Allen was already questioning the common official description of American policy (i.e., “keeping Tito afloat’). By this time, he observed on a February visit to Washington, Tito’s regime had the resources to survive physically with- out U.S. aid.? It still remained to be seen whether the Yugoslav economy could reform itself within a still socialist framework in order to take advantage of an international economy whose trade level was rapidly rising and whose financial structure was becoming more complex. During the 1954-64 period, Yugoslavia could claim two achieve- ments for its foreign economic policy, neither of which directly derived from relations with the United States. First, the Yugoslav economy established a full set of commercial relations with Western Europe and by the late 1950s conducted the largest country share of its foreign trade with 48 Yugoslav-American Economic Relations neighboring Italy. Familiarity with the advantages of free markets and multilateral trade grew accordingly. This familiarity was probably more important in prompting Yugoslav interest in joining the General Agree- ment on Tariffs and Trade (Garr), finally accomplished in 1961 as noted below, than was the considerable American encouragement to do so. Secondly, Tito’s foreign policy had taken Yugoslavia to the forefront of the emerging nonaligned movement in 1961. Belgrade hosted the first nonaligned summit conference of these Third World states. For Yugo- slavia this nonaligned perspective would in later years provide the basis for repeated anticapitalist and anti-Western rhetoric in the United Na- tions and in its Conference on Trade and Development (UNCTAD). Such rhetoric, which contrasted sharply with domestic efforts toward market- oriented reform, followed more from Yugoslavia’s leading political posi- tion among the developing countries of the nonaligned movement than from traditional Marxist-Leninist economic analysis, let alone any resid- ual Soviet influence. Political rapprochement with the Soviet Union and its Eastern European allies had, of course, begun in 1955 and was accompanied by the revival of trade relations with these countries. Both political and economic relations were, however, established on basically Yugoslav terms of noninterference in internal affairs and became a foundation stone of the evolving Yugoslav policy of careful balance between East and West. American policy toward Yugoslavia during the 1950s was obviously tied to the tensions of the Cold War, which had erupted into a shooting war in Korea at the start of the decade, and to the continuing perception of a worldwide Soviet threat by a large majority of the U.S. Congress and public opinion. Tito’s rapprochement with the Soviet regime thus trig- gered fears in some Americans that he was returning to their adversary’s camp. The closer the Yugoslav-Soviet relationship appeared to be, the more apprehensive the U.S. Congress became about continuing to assist Yugoslavia. Conversely, when Yugoslav-Soviet relations soured again in the late 1950s, back came the old American enthusiasm for treating Yugoslavia favorably, as a special case among Communist regimes. This simple scenario neglects the growing desire in both countries to ‘make credit and two-sided cooperation the economic basis for bilateral relations, rather than Yugoslav reliance on outright American assistance. Such a cyclical view of bilateral relations also omits two other, longer- term influences on the foreign economic policy of the United States. These were the ongoing American debate over a rationale for economic aid, or at least easy credit, to developing countries and the domestic Soft Loans and Hard Bargaining 49 pressure from representatives of U.S. farmers to increase export sales of surplus produce, even if that required sales on very soft terms. Opening both avenues to Yugoslavia would require hard bargaining between the executive and legislative branches of the American government. Hard bargaining between the U.S. and Yugoslav governments would occur less in the area of development aid than over the terms of agricultural sales, over normalizing trade relations, and over controlling the most persistent problem for Yugoslavia’s postwar position in the international economy, a balance of payments deficit on current account. It was perhaps fortunate for the conduct of these complex bilateral relations that the Tripartite agreement with Britain and France for shoring up the Yugoslav payments deficit had come to an end by 1954. The 1954 Payments Crisis and the End of the Tripartite Agreement —The British decision in early 1954 to grant no further aid to Yugoslavia effectively ended the Tripartite agreement for import credits to Yugoslavia. The French contribution had been only 12 percent of the total to start with, and the British amount declined from 23 percent for 1952 to less than 3 percent of the total amount for the second quarter of 1954, before ending entirely.2 Yet the appearance, if not the reality, of the agreement lived on for the rest of the year. Thereafter a series of bilateral relationships would predominate in Yugoslavia’s Western economic dealings until the joint assistance of the early 1980s. As the Yugoslav debt crisis dragged on through 1954, it was primarily West German credits and the prospect of Italian trade that insured the disappearance of the old three-cornered arrangement. The 1954 crisis was the first of several that have periodically con- fronted the Yugoslav economy with the consequences of borrowing too much from its Western trading partners and selling them too few exports in return. Only one, in the early 1980s, was followed by a series of current account surpluses in hard currency trade that could contribute to a longer-term resolution of the problem. The U.S. government would playa leading role in the coordinated Western approach to the early 1980s crisis, as Chapter 6 will indicate; in 1954 the American contribution was to facilitate unwittingly an uncoordinated, virtually bilateral approach. Separate Yugoslav arrangements with their various Western European creditors emerged at the same time that further American aid took the form of soft sales of surplus food and equally soft development loans from 50 Yugoslav-American Economic Relations general U.S. programs not designed specifically for Yugoslavia, let alone coordinated with Western allies for that purpose. At the onset of the 1954 crisis, however, the hope of the U.S. State Department was to broaden rather than abandon the coordinated ap- proach of the Tripartite agreement and to discourage the bilateral deals still associated in American minds with the German clearing accounts of the 1930s. Thus the March 12 request of Ambassador Popovié that the State Department use the Tripartite mechanism to obtain debt relief for Yugoslavia in Western Europe prompted a still more ambitious American plan for a coordinated response—a full-scale conference between creditor governments and Yugoslav representatives which the Tito government itself appeared to desire that summer. Economic reports from the American Embassy in Belgrade made it clear that the Yugoslav side was not exaggerating the payments problem that it would face in 1954—55. If short-term debts owed to West Germany, Great Britain, Belgium, and other Western European countries were to be repaid, the Yugoslav debt service ratio (interest and principal payments coming due as a percentage of export earnings) would rise to 20 percent in 1954 from 7 percent in 1953. The Yugoslav trade surpluses with Western European creditors that were needed to make these payments could be achieved only by drastic reductions in imports for at least the next two years. Both the ambitious efforts to develop heavy industry and an already precarious standard of living would suffer. The American interest in approaching the necessary rescheduling of debts due through a creditors’ conference included the clearly stated desire to discourage both the Yugoslavs and their creditors from bilateral arrangements that would run counter to the general Western European movement towards free trade in convertible currencies. That interest went still further, according to the American Embassy in Belgrade. Its lengthy review of the rationale for such a conference argued that the United States had a greater interest in promoting the general economic health of Yugoslavia than did the European allies, whose ‘‘narrow com- mercial interests” outweighed political considerations of Western secu- rity.4 In addition, U.S. representatives could make good economic use of ' such a conference to oblige the European allies to recognize that the developing Yugoslav economy would need access to Western credit for many years to come. The conference might also provide leverage for pushing Yugoslav policymakers toward restraining investment in heavy industry and infrastructure. Previous American pressure had reduced the number of industrial projects that Yugoslavia was undertaking, but with Soft Loans and Hard Bargaining 51 the perverse effect of concentrating scarce capital resources in heavy industry rather than domestic consumer goods or potential export pro- duction. The American Embassy in Belgrade hoped that Yugoslav atten- tion to more credit-worthy investment would result from the conference. The issue of “‘conditionality” for further credit thus appeared for the first time long before the mr’s terms for assistance to Yugoslavia in the early 1980s. The Yugoslav position at that early date was not fully understood by the American side. Tito was surprised that the U.S. grants had continued for as long as they had. Now the Yugoslav aim was to make the transition from aid to credit recipient without falling victim to an excessive burden of debt repayment. One means of lightening that burden was of course the negotiation of longer-term repayment through a creditors’ conference. Another strategy that some of the country’s leadership was already urging in 1954 was a shift of investment toward agriculture, in order to end the need for food imports and to open up the chances for export to Western Europe.® The American strategy for arranging such a conference by the sum- mer of 1954 was to approach the British government before talking to the French or even the Yugoslavs. A lead from Great Britain, Yugoslavia’s other principal creditor in Western Europe, would better serve to draw in West German participation, the State Department argued, especially in light of a bilateral agreement for extending Yugoslav repayment of short- term debts to the Federal Republic that had been tentatively reached in March. A British lead would also deflect Yugoslav expectations that major new amounts of American aid would be forthcoming. The Tripar- tite framework would at the same time reassure both Yugoslav authori- ties, who did not wish to deal with private creditors, and private indus- trial creditors, who did not wish to play the role of international bankers and reschedule the debts owed to them. The initial British response was favorable. By June their embassy in Washington had approved the idea of a conference in Belgrade and was proposing that preliminary talks get under way there as soon as possible.® All creditor countries would attend, and prewar debts would be included on the agenda. The twr and the World Bank would also be represented, according to the British formulation, and the American Export-Import Bank (Eximbank) would be asked to join in the general rescheduling of Yugoslav debts. The prospects for a coordinated Western approach soon dissolved, however, in the face of several disagreements. The French government 52 Yugoslav-American Economic Relations would not agree to include prewar debts, a subject it would pursue separately until final resolution in 1959. In any case the French argued for the postponement of any creditors’ conference until the fall of 1954. The U.S. State Department was also unhappy with the British proposal to include all debts. Such an approach might create the impression that the Yugoslav government was insolvent. More specifically, the American Embassy in Belgrade argued, the U.S. Eximbank would in all likelihood be asked to reschedule repayment of its own loans again. This the bank had already done in 1952, and its leadership would be reluctant to do so once more, particularly in view of the British refusal to follow suit on the earlier occasion. Nor was there any realistic prospect of a new line of Eximbank credit to support Yugoslav debt retirement in general. The American approach favored a narrower agenda that would address post- war Yugoslav debts in Western Europe and a set of budget procedures and investment strategy ‘‘conditions” to which the Yugoslav government would have to agree. In return Belgrade would be able to draw on American receipts from the official sale of surplus agricultural products to Britain and West Germany to cover some of its short-debt obligations to those two countries. British representatives opposed the imposition of long-term conditions for debt relief. This was hardly the role that the State Department had foreseen for their British counterparts, whose leading role in calling the conference was to have been “‘provisional” and not “dominating.”’ These various disagreements doubtless encouraged the British to enter into bilateral debt negotiations with the Yugoslavs in the fall of 1954. By now the State Department wished to avoid a general conference, in order not to invite new Yugoslav demands for assistance. The British initiative allowed the idea of a conference to recede without the United States having to oppose it. The Trieste settlement in December, 1954, eagerly awaited by the State Department, put a final end to Yugoslav interest in a creditors’ conference, as attendant Italian credits and the prospect of much increased Italian trade provided a new source of debt relief.” Yugoslav exports to Italy doubled between 1953 and 1956 to surpass those to any other Western country, and credits covered the tripling of imports, which had equaled exports in 1953.8 This access to a new Western trading partner and creditor provided many of the industrial inputs needed for the Yugoslav economy to continue a strategy of growth while at least maintaining a constant standard of living, without infu- Soft Loans and Hard Bargaining 53 sions of new British or West German credit. Of comparable importance to this strategy, however, was the continuing availability of American foodstuffs on soft terms to a Yugoslav economy whose own agricultural sector, recently traumatized by the abortive collectivization drive of 1949-51, would not show signs of increasing productivity and potential self-sufficiency until the late 1950s. Without American grain deliveries, a significant share of Yugoslav imports and investment funds would have had to be diverted from industry to agriculture. Surplus Food and Counterpart Funds under PL 480 — U.S. government sales of agricultural surpluses to Yugoslavia for dinars began in 1954. Some $25 million worth had already been donated by private relief organizations between 1950 and 1952. This decison was taken well before the debate in the United States over development aid, which would lead by the late 1950s to soft loans for Yugoslavia and various Third World countries. Section 550 of the Mutual Security Act of 1951, inspired primarily by the Korean War principles of giving eco- nomic support to countries receiving military aid, provided for sales of foodstuffs at market prices against payment in local currency. In 1954, $35 million worth of foodstuffs were sold to Yugoslavia under this section, accounting for over one-half of the $66 million worth of U.S. goods imported into Yugoslavia that year. Public Law (PL) 480, perhaps the most famous numerical designation for any piece of American legislation, placed such sales on a permanent basis. Officially titled the Agricultural Aid and Assistance Act of 1954, it included under Title I the “‘soft’’ provision for sales in local currencies.9 The Republican Eisenhower administration had supported this provision under prompting not from the State Department but from the Department of Agriculture. Driving the latter’s interest was widespread congressional support from the largely Republican farm states for a new program to support sales of agricultural surpluses abroad, outside the control of the Mutual Security Act and with its own appropriations for dollar payments to farmers. Agricultural products were after all a larger share of American sales abroad than of any other Western economy’s exports. The American Farm Bureau Federation, a private, relatively conservative farm lobbying organization, reportedly joined forces with the Agricultural Committees of the House and Senate to draft PL 480.1° Its initial terms authorized only $700 million in sales of foodstuffs 54 Yugoslav-American Economic Relations purchased by the Commodity Credit Corporation from farm surpluses over a three-year period ending in mid-1957. Two subsequent increases, however, pushed the authorization to $3 billion by 1956. President Eisenhower promoted the increase with talk of ‘“mountainous supluses” and the threat to U.S. agricultural exports posed by foreign competition. The domestic political appeal of the program may be judged from the fact that in 1956 it accounted for 27 percent of the value of U.S. wheat exports, 24 percent of rice, and 47 percent of vegetable oil. Wheat sales were large enough by 1957 to provoke protests of unfair competition from the Australian and Canadian governments. The State Department supported these objections but was overridden. The White House had no desire to lose farm support or the flexibility that PL 480, now under the rubric of Food for Peace, added to its foreign aid program, otherwise still largely tied to military assistance under the Mutual Security Act (msa).12 Before PL 480 could be used to assist Yugoslavia, however, it was necessary to obtain Yugoslav agreement to the terms specified in that law. Although the terms of PL 480, Title I, seemed ‘‘soft”’ to U.S. officials and congressmen, they did not provide for the direct grants that Yugoslav negotiators were seeking. In June, 1954, Yugoslav Vice President Svetozar Vukmanovic-Tempo, an early advocate of wider trade relations with the West, presented his government’s request for assistance for the three-year period 1955—57, rather than the usual one year, to the American Embassy in Belgrade. The request exceeded considerably the amounts envisaged under the sa. In addition to relief from a pressing British debt by means of a long-term loan, Tempo sought further shipments of wheat and in- dustrial raw materials, principally cotton. The State Department quickly rejected any approach to the Eximbank for a loan but identified PL 480, Title I, sales as the most likely source of supplies, especially over several years. At a February meeting of the National Security Council, President Eisenhower raised the idea of trading wheat for a Yugoslav settlement of the Trieste issue with Italy but was reminded by the State Department that the Yugoslavs were ‘‘very sensitive to any suggestions of bribery.” 12 In November, Tempo traveled to Washington to put the Yugoslav request directly to the State Department for 700,000 tons of wheat for fiscal 1955, in addition to the 400,000 tons that had already been pro- vided. The Americans responded with an offer of another 450,000 tons plus $10 million worth of cotton and $1 million worth of tobacco, all under Title I, with an option to seek another 125,000 tons of wheat in the U.S. open market for nondollar currencies or for barter. Tempo “took Soft Loans and Hard Bargaining 55 strong exception” to the Title I terms requiring dinar repayment; he had expected a grant, and he argued that accepting more debt, even in dinars, ran counter to his government’s present policy. The provision for to- bacco-growing Yugoslavia to buy U.S. tobacco further incensed him. In fact the Belgrade government and Tito himself had already accepted PL 480 in principle. Here was a way of facilitating their aforementioned desire to end dependence on aid. Their only reservations concerned the possibility that the United States might seek to use the dinars due it to interfere in internal Yugoslav affairs. The initial American offer would have set aside 40 percent of the proceeds for U.S. purposes. The mercurial Tempo abruptly informed his American hosts, at a diplomatic reception midway through his planned visit, that he objected so much to PL 480 that he would return to Belgrade the next day. Yugoslav diplomats were able to dissuade him from leaving for another twenty-four hours, however, with the argument that a new American offer was forthcoming. In some haste both sides worked through the night at the home of one U.S. official, drawing up a framework for further negotiation which preserved Yugo- slav acceptance of PL 480 and which Tempo would not reject out of hand. Tobacco sales were dropped, and the share of wheat and cotton sales proceeds for U.S. uses was cut to 10 percent. By late December authorities in Belgrade had agreed to precise terms for the first purchases in dinars within the existing provisions of PL 480’s Title I.13 Once agreement had been reached, Yugoslavia became a major recip- ient of PL 480 food shipments under both Title I (government sales for local currency) and Title III (private relief shipments from voluntary agencies). In 1955 the Eisenhower administration allocated $47.5 million to Yugoslavia under Title I and $62 million under Titles II and III. As shown in Table 3.1, it provided another $320 million of Title I deliveries between 1956 and 1960, during which time a further $111 million worth of agricultural products was shipped under Title III, plus $1.4 million under the emergency aid provisions of Title II. The Kennedy and Johnson administrations shipped $205 million under Title I in the years 1961-64. Dollar sales under Title IV began in 1962. They totaled $77 million for 1962-64 and then rose to $83 million for 1965 and $131 million in 1966, the last year of such sales. The donation of foodstuffs through CARE and other nonprofit relief organizations as nonrepayable grants under Title III declined sharply after 1955 and again after 1959, but Title I direct sales for dinars surpassed $80 million in 1957, 1959, and 1962-63. Some $573 million would be dispensed under Title I for 1955-64, $243 million 56 Yugoslav-American Economic Relations Table 3.1. PL 480 Sales and Grants, pLF and Other Loans, Other Economic Grants to Yugoslavia, 1952-1968 (U.S. fiscal years, millions of dollars) PL 480 Title I Title IV (Sales (Sales Titles II DLF and Other for for and III Other Econ. Dinars) Dollars) (Grants) Loans Grants Total 1952 — — 24.8 — 81.2 106.0 1953 — = a2 — 122.4 122.6 1954 — — Alea — 66.5 67.6 1955 47.5 — 61.9 — 43.7 dodel 1956 68.4 oo 8.7 15.0 14.8 106.9 1957 84.1 — 32.8 USI) 1.5 131.9 1958 65.2 i 28.8 8.0 Ber) 105.7 1959 85.4 a 27.9 59.2 4.2 176.7 1960 L723 — 14.2 40.8 4.1 76.4 1961 26.9 aos 14.1 Aah 3.8 97.5 1962 82.4 16.3 aly — 2.0 115.8 1963 81.5 16.0 14.3 a “Al 111.9 1964 14.6 44.4 13.4 — — 72.4 1965 — 82.9 4.7 = a 87.6 1966 — Ladles 4.6 — — 135.9 1967 — — 2c3 — — 2.3 1968 — — male — — sal TOTAL 573.3 290.9 269.0* 189.2> 348.0 1,670.4 Source: Agency for International Development, U.S. Overseas Loans and Grants, Obligations and Loan Authorizations, July 1, 1945—September 30, 1988, Statistical Annex 1. Title II grants for emergency assistance were extended only in 1955 ($45.3 million) and 1957 ($1.4 million). The remaining $221.8 million came from care and other voluntary relief agencies under Title III. bOf which, 9 ptr loans for 1959-61 furnished $97.4 million. Supplemental security loans on soft terms accounted for $64 million for 1956-61. under Titles II and III for 1955-68, and $291 million under Title IV for 1962-68. The regular congressional review of this program nonetheless put the Yugoslav portion in recurring jeopardy. Both the original 1954 legislation Soft Loans and Hard Bargaining 57 and its expanded 1956 version contained provisions that prohibited sales under any of the four titles to a Communist regime. The Eisenhower administration tried hard to insert general language in the 1956 law permitting sales to Eastern Europe but was rebuffed in both the House and Senate. It thus remained necessary to insert specific language i in each act exempting Yugoslavia from the general ban. American reaction to the state of Yugoslav-Soviet relations contrib- uted significantly to fluctuations in the annual amount of Title I credit extended to Yugoslavia through the latter half of the 1950s. The resump- tion of normal relations between the USSR and Yugoslavia in 1955 and the subsequent Soviet offer of a $300 million trade credit revived earlier apprehensions in the United States. Preparations had been under way for an American invitation to President Tito to visit Washington for the first time, but now they were held up. By the fall of 1955, however, the American side had come to terms with Nikita Khrushchev’s famous visit to Tito that June, recognizing that the resulting Belgrade Declaration was essentially drafted on Yugoslav terms of noninterference in internal affairs. Congress was reassured in similar fashion by testimony offered by the American ambassador to Belgrade and veteran diplomat, James Rid- dleberger, and by the head of the Foreign Operations Administration and long-time internationalist, Harold Stassen. The Yugoslav government’s skilled ambassador in Washington, Leo Mates, attempted similarly to reassure the secretary of state, John Foster Dulles, that the terms of U.S.- Yugoslav relations had not changed. In early November, following a successful visit by the State Department’s Robert Murphy to Belgrade the month before, Secretary Dulles sealed the American vote of confidence by adding a personal meeting with Tito to his own scheduled European tour. Midway through their meeting on Tito’s island retreat of Brioni (near Pula), the Yugoslav leader persuaded the American diplomat to accom- pany him, unescorted and much to the consternation of Yugoslav security men, for a ride in Tito’s power launch. During an hour of entirely private talk, Dulles reportedly became convinced once and for all of the Yugoslav commitment to independence.'4 Dulles’s visit also reassured the Yugo- slavs, as face-to-face meetings with American leaders had and would continue to do. Tito’s initially negative reaction to the ruthless Soviet suppression of the Hungarian uprising in October, 1956, helped to sustain administra- tion and congressional support for food surplus credit for Yugoslavia into 1957. That year’s credit under Title I, approved in the fall of 1956, was the 58 Yugoslav-American Economic Relations highest yet, $90.3 million, but a series of events in 1957 led to a reduction of these credits for the following year. Yugoslav acceptance of a new Soviet trade credit for $285 million fed earlier American apprehensions. Then the Yugoslav government not only exchanged visits of defense min- isters with the USSR but also granted formal recognition to the Commu- nist regime in East Germany. Following the terms of its Hallstein Doc- trine, the West German government of Konrad Adenauer promptly broke diplomatic relations with Yugoslavia. (The breach was not repaired until West Germany abandoned its position in 1968.) These external measures coincided with the internal Yugoslav deci- sion to sentence the former party leader and now critic, Milovan Djilas, to a second and longer prison term. Ambassador Riddleberger was conspic- uously called back from Belgrade for consultation, and hard-line congres- sional opponents of any aid to Yugoslavia took new heart. They concen- trated their fire on U.S. military aid to Yugoslavia, some $694 million since its inception in1951 but just $105 million for 1955—58.15 President Tito reacted shrewdly to this implicit pressure by suggesting himself that military aid be ended except for spare parts. (Yugoslav arms production had in fact made major progress by this time.) Although economic aid drew less congressional fire, the Title I sales of surplus food were cut to $71.9 million for fiscal 1958. Their rise to a record $94.8 million for fiscal 1959 followed the next shift in Soviet-Yugoslav relations. What Western scholars at the time called ‘‘the second Soviet-Yugoslav dispute” came to a head in April, 1958.16 Yugoslav refusal to adhere to the recent Moscow Declaration for world Communist unity under Soviet leadership prompted a Soviet-led boycott of the Seventh Congress of the League of Yugoslav Communists (Lcy). Accompanying a spate of sharp attacks on “‘ Yugoslav revisionism” throughout the Soviet sphere was Khrushchev’s decision to ‘““‘postpone”’ a proposed trade credit of $285 million. Tito responded by blaming the entire dispute on Soviet reaction to Yugoslavia’s refusal to sign the 1957 Moscow Declaration. Taking note of the Yugoslav loss of Soviet credits, the Eisenhower administration announced in December that aid to Yugo- slavia for 1959 would include not only the aforementioned sum of $94.8 million under PL 480, Title I, but also an unprecedented $59.2 million in soft loans. Moreover, a series of mutual agreements ended American off- shore procurement and supply of food, raw materials, surplus equip- ment, and special facilities to the Yugoslav army but replaced them with a single more flexible program for dollar purchases. It would operate at the Soft Loans and Hard Bargaining 59 discretion of the White House outside the constraint of annual congres- sional approval.” The roughly inverse correlation between U.S. economic aid to Yugo- slavia as represented by Title I food deliveries and the state of Soviet- Yugoslav relations during the previous year, which had prevailed throughout the 1950s, did not carry over into the 1960s. By then the variety of existing American programs, the Cuban missile crisis and the several facets of Yugoslav foreign policy complicated the political equa- tion between the two countries beyond any such simple correlation. To illustrate we may note that U.S. Title I sales to Yugoslavia, after declining sharply in 1960 and 1961, rose again to near record levels of $90 million in 1962 and 1963. Yet Soviet-Yugoslav relations had remained chilly for the first two years and warmed up again noticeably during the second two. Before turning to the brief Kennedy era, we should note that Title I sales under PL 480 created an important new dimension in U.S. economic relations with Yugoslavia. This related to the use of so-called ‘‘counter- part funds,” the dinar proceeds of Title I agricultural sales, which were available to be spent by the American government in Yugoslavia. Only 10 percent of Title I proceeds were designated for covering the cost of official U.S. representation in Yugoslavia. Another 25 percent was to be spent on economic or technical projects agreeable to both sides which promoted Yugoslav development. These stipulations coincided nicely with the aforementioned Yugoslav desire to prevent the possibility of American interference in internal affairs by means of the dinar debt. By 1957 the Yugoslav ambassador in Washington, Leo Mates, and other officials in Belgrade were pushing for the use of counterpart funds on large infra- structure projects such as the new coastal road from Rijeka to Bar. Intended to promote tourism on the obviously successful Austrian model and thus relieve pressure on the payments balance, the Magistrala was also supported by Yugoslav army leaders. Their contacts with American officers of the military assistance mission in the early 1950s had dis- suaded them from initial suspicions that U.S. forces were looking for a pretext to intervene, wherein such a road would only have eased access. The use of counterpart dinars for this and other projects helped greatly to remove Yugoslav reservations about the long-term U.S. loan program for development aid described below. In later years “‘surplus dinars” were also directed to the Fulbright Program of scholarly ex- changes, to paying U.S. Social Security pensions to Yugoslav-American 60 Yugoslav-American Economic Relations citizens who had returned to Yugoslavia, to meeting U.S. expenses at the Zagreb and other Yugoslav trade fairs, and to disaster relief, as in the wake of the Skopje earthquake of 1963.18 Long-term Development Loans and a New American Approach —Long-term American loans were appropriated from the federal budget specifically for Yugoslav economic development only briefly, from 1959 to 1961. These nine loans from the Development Loan Fund (DLF), as shown in Table 3.1, totaled just $97 million but were of much greater significance for the bilateral relationship than this relatively modest total might indicate. The nine separate agreements between 1959 and 1961 generated joint consultation and monitoring between Yugoslav economic officials and enterprise directors on one side and U.S. represen- tatives of the International Cooperation Administration (1cA) and its 1961 successor, the Agency for International Development (amp), on the other. All of the nine projects were directed, with considerable accuracy, toward the long-term development of Yugoslav industry and infrastructure rather than the short-term relief of food shortages or provision of military supplies which had characterized previous American aid. Three railway loans totaling $25 million afforded the delivery of diesel locomotives, spare parts, and technical assistance for a rail system that, because of pre-1914 divisions, would have been a weak link in the Yugoslav econ- omy even without the widespread damage of two world wars. These locomotives later became known in everyday Yugoslav parlance as ‘‘Ken- nedies,”’ despite the fact that most were supplied while the Eisenhower administration was still in office. Three industrial loans provided $25.5 million to construct a fertilizer plant in Pancevo near Belgrade, $23 million for a Zagreb plastics and chemical factory, and $8.5 million to construct a steel mill at the Croatian rail junction of Sisak. Three further loans furnished $15 million worth of hydroelectric equipment to a new power plant in Montenegro and $423 million worth to a thermoelectric plant in Kosovo. With extended repayment periods of up to forty years, the loans for 1959-60 carried below market interest rates of 3.2 to 5.4 percent and, most important, were repayable in dinars rather than dollars. The 1961 loans were repayable in dollars, but the first payment was not due for ten years and the interest rate was only .75 percent. In any case Yugoslavia would complete their full repayment by 1983. The wider importance of these agreements was threefold. First, their Soft Loans and Hard Bargaining 61 implementation instructed a wider circle of American officials in the Yugoslav capacity for open, economically efficient investment projects and a wider circle of Yugoslav officials in the capacity of the American side to provide technical as well as financial assistance without attempt- ing political interference. Second, the process of applying for pLF loans and complying with pF stipulations on their use provided evidence of Yugoslav competence and creditworthiness which would prove useful and perhaps essential for renewed Yugoslav access to World Bank loans from 1961 forward. Third, the ptF loans marked a transition in U.S. aid policy, not only toward Yugoslavia, but for developing countries gener- ally, away from military aid for strictly anti-Soviet reasons toward more broadly based economic aid, and from emergency funding to promotion of long-term economic development. In any event the transition would prove difficult to sustain on a bilateral basis and would by the late 1960s lead to the diversion of most American resources for long-term develop- ment into multinational institutions, notably the World Bank. Despite the small size of these piF loans, the case of Yugoslavia was at the center of this attempted American transition. From the beginning of the Korean War until the mid-1950s, American policymakers saw the Soviet threat to the security of smaller states as essentially military. Foreign military aid was twice the economic total by the early 1950s. The latter had virtually disappeared by 1955. By that time, however, the Soviet Union’s own program of economic aid to developing countries was well under way. What in the United States came to be called the ‘‘Soviet economic offensive” dated from a 4 million ruble grant from the USSR to the United Nations’ Expanded Program of Technical Assistance in July, 1953, and the announcement of trade credits and the construction of a large steel mill for India the following year. Soviet trade and development credits in 1954, 1955, and 1956 approached the total sum, modest as it was, granted by the entire Soviet bloc to all countries, Yugoslavia included, from 1945 to 1954.19 The American response was slow but sure in coming. In 1955 one American adviser called the new Soviet approach ‘‘muscling in on Santa Claus” and warned that the American side should counter with further initiatives of its own. President Eisenhower had been committed at the start of his administration in 1953-54 to replacing aid with trade. Yet three separate commissions were convened during 1956 and 1957 to prepare reports on the advisability and direction of foreign economic aid. The first, submitted by eminent economists Max Milikan and W. W. Rostow, was the most persuasive at the time. It supported a new and 62 Yugoslav-American Economic Relations substantial aid program not only as an anti-Soviet counteroffensive but also on the more general grounds that successful economic development in the Third World would blaze the surest trail to political democracy on the Western model. This approach was reminiscent of the postwar “politics of productivity,” as an American strategy for promoting eco- nomic recovery without imposing political reform as a condition. Al- though criticized elsewhere as a U.S. rationalization for aiding right-wing regimes, this approach also opened the door for aid to the independent Communist government of Yugoslavia. The third committee report was the most prophetic for U.S. policy later in the 1960s. This committee, headed by U.S. Steel President Benjamin Fairless, expressed the judg- ment of the American business community that trade and private invest- ment were more likely to promote Third World development than foreign aid, including even soft loans, which ought to be cut back severely.?° The Eisenhower administration opted for the Milikan-Rostow recom- mendations. A new source for soft development loans entirely under U.S. control would offer the added advantage for the administration of under- cutting a Third World proposal of several years’ standing (one consis- tently backed by the Soviet Union) for the creation of a Special United Nations Fund for Economic Development (suNFED). The presumption of a large U.S. contribution made the powerful secretary of the treasury, George Humphrey, an opponent of suNreD from the start. American Ambassador to the United Nations Henry Cabot Lodge briefly advocated SUNFED, but Secretary of State Dulles decided in favor of a purely U.S. program. His department’s Policy Planning Staff quickly drafted a pro- posal for a Development Loan Fund (pLF) capitalized at $2 billion. Dulles asked for a $750 million appropriation for fiscal 1959. The way in which this sum was whittled down and its long-term continuance was questioned reflects the congressional opposition that such a fund would face, whichever developing economies might receive its loans. Powerful Senate Democrats joined a larger number of Republi- cans led by William Knowland of California in opposing the creation of any permanent U.S. program. They would finally agree to an authoriza- tion for no more than two years at a time. Senator Knowland also singled out Yugoslavia as undeserving of any loans, in order that Tito not be “rewarded for neutralism.”’ The House of Representatives went even further than the Senate, cutting the authorization to one year and the appropriation to $300 million. Some of the House opposition came from southern Democrats who wished to embarass the Republican administra- tion over foreign aid in retaliation for civil rights legislation facilitating Soft Loans and Hard Bargaining 63 the registration of black voters. Other opponents simply did not wish to spend any tax revenues outside the United States.21 The final struggle over appropriations between the House and Senate restored a two-year authorization but left the loanable funds for 1958 (fiscal 1959 from July 1, 1958) at just $300 million. The figure rose to $550 million for 1959 and then peaked at $1.1 billion in 1962 under the urgings of the Kennedy administration. By then, for reasons of congressional opposition which will emerge shortly, Yugoslav access to pLF loans was no longer possible. It is important to note, however, that the $55 mil- lion obtained by Yugoslavia in five separate loans for 1959 comprised fully 10 percent of that year’s total for the entire U.S. program world- wide.?2 By the late 1950s Yugoslav authorities had developed the reputation in Washington of reliably presenting solid loan projects, even on short notice. When a officials in Washington had surplus funds toward the end of the fiscal year and needed to ‘‘spend them or lose them,” they turned to their mission in Belgrade first on several occasions because “‘the Yugoslavs could be counted on,” as one American Embassy officer re- Galls,23 This enviable reputation undoubtedly contributed to Yugoslavia’s now qualifying for long-term development loans of at least comparable size from the World Bank. The pLF program’s economic criteria, requiring the recipients to make acommitment to develop their export capacity and to account precisely for project loans, were the same as those of the 1srp, formally called by 1960 the World Bank, its informal name from the start. In addition, the legal limitation that had banned further iprp lending to Yugoslavia after 1953 had now been removed. In 1959 the long-standing commitment of the Yugoslav government to come to terms with represen- tatives of the Western holders of prewar Yugoslav bonds, primarily from the Blair loans of the 1920s, finaily resulted in a specific agreement for paying compensation. Since the pgp had raised a large part of its loanable funds by the sales of its own bonds on the open New York market, the bank’s disinclination to lend to countries with whom American bond- holders had not resolved their differences was understandable. That obstacle’s removal coincided with two other developments favorable to borrowers such as Yugoslavia.24 First, the bank’s loanable funds doubled during the late 1950s, reaching $1.6 billion by 1960. Second, its long-time president, Eugene Black (an American, as by agreement all the bank’s heads have been) had now moderated his initial opposition to development-oriented ‘‘soft’’ loans (i.e., for long periods at 64 Yugoslav-American Economic Relations interest rates below the market level). His later readiness to entertain such lending may be seen in his 1960 sponsorship of the bank’s new Interna- tional Development Association (1pa) for loans to countries with the least developed economies. Even with a favorable attitude on the part of the U.S. government, loans from the original 1srp component of the World Bank would not have resumed in 1961 without Black’s support. Project loans to Yugoslavia of $30 million in 1961 and 1962 were followed by two more for $35 million each in 1963. Persuasive proposals for these small- scale loans and their repayment as scheduled set the stage for increasing Yugoslav access to World Bank funding since that time. Yugoslavia would receive 6 loans totaling $480 million during 1964—69, 26 for $937 million during 1970—76, and 37 for $2,759 million during 1977-83. By 1983 the grand total authorized by the 1srp since 1949 would reach $4.1 billion with $2.7 billion disbursed and $810 million repaid.25 Crises of the Early 1960s: International Payments Problems and the MFN Controversy — While World Bank lending during the 1950s and early 1960s has been properly criticized as too limited, American foreign aid over the same period has been marked down, with equally accurate hindsight, for its ‘‘“vague criteria” and the uncertainty of its long-term commitment.2® This uncertainty undoubtedly led some recipients to claim crisis condi- tions, seek support for the largest projects, and spend aid as quickly as possible. Yugoslavia seemed to have avoided these temptations. Its economy therefore appeared ready to take important advantage of the Kennedy administration’s commitment to the World Bank and to a better- coordinated aid program as the 1960s began. The prospect of further aid was elusive, however. In addition to the above mentioned congressional reluctance to support an expanded aid program, two further problems diverted the direction of Yugoslav-American economic relations from this longer- term approach during the period 1960—64. One was the recurrence of some genuine elements of crisis in Yugoslavia’s balance of international payments. The other was pressure from the American Congress to cut off most-favored nation status for Yugoslavia at the very time the Yugoslav government was attempting to solve its payments problem by adjusting its trade practices and exchange rate according to Western market stan- dards. Soft Loans and Hard Bargaining 65 Despite the substantial growth in Yugoslavia’s industrial exports for 1955-59, the actual reduction in the large payments deficits of the early 1950s was smaller than had been anticipated. As chapter 4 will indicate in detail, the continuing deficits were widened by import of industrial equipment and other inputs, principally from West Germany and Italy. At the same time these imports contributed significantly to the most rapid period of industrial growth in Yugoslav history. Food imports from the United States, primarily PL 480 sales for dinars, had not added to the payments burden. Meanwhile, increasing domestic investment in agri- culture, up fourfold from 1956 to 1959, offered the possibility of eventual self-sufficiency in wheat and export capacity in corn. A bumper Yugoslav grain crop in 1959 made this prospect a reality for that year and enabled the country to get by with much smaller American grain deliveries. In 1960, however, a 10 percent drop in the grain harvest coincided with a growing burden of short-term foreign debt and an unexpectedly high payments deficit.27 Under the pressure of this deficit, the Yugoslavs were forced to re- examine their pledge to reduce tariffs and eliminate the complex system of multiple exchange rates that had grown up since the 1952 devaluation. How could the Yugoslav side pursue these laudable intentions, launch their next Five-Year Plan (1961-65), and become a full member of GatT unless a large new infusion of Western aid were provided on an emer- gency basis? The crisis atmosphere of the early 1950s had returned, this time for reasons of long-term reform rather than short-term survival. In September, 1960, Yugoslav Finance Minister Minchev, who was in Washington for the mr’s annual meeting, presented his government’s request for assistance to Under Secretary of State Douglas Dillon. The outgoing Eisenhower administration took the lead in putting together a sizable international package of $275 million in December, 1960. The U.S. share of the package was $100 million. In response to urging from the United States, Great Britain, and the mr, the French, Austrian, Italian, Dutch, and Swiss governments joined with a consortium of West German banks to provide an additional $100 million. The mr itself extended a $75 million line of credit in various Western currencies. The U.S. contribu- tion came from several sources: $25 million each from the Development Loan Fund and the Mutual Security Act and $50 million divided between the Eximbank credits and a half million tons of wheat delivered under Title I of the PL 480 program by July, 1961, in order to relieve the shortfall in the 1960 harvest.28 66 Yugoslav-American Economic Relations Following the 1960 election the Kennedy administration that took office in January, 1961, was committed to a policy of support for Yugo- slavia’s independence. As a young congressman John Kennedy had made a point of visiting Tito in Belgrade as early as 1951 and by the late 1950s had become a leading advocate of strong U.S. ties with Yugoslavia. The importance that President Kennedy attached to Yugoslavia may be seen in his appointment of George F. Kennan, the first director of the State Department’s Policy Planning Staff and former envoy to the Soviet Union, as the new American ambassador. Another favorable omen was his appointment of former Under Secretary of State Douglas Dillon as his secretary of the treasury. Unfortunately for the course of smooth bilateral relations, however, the Yugoslav government took a number of steps in 1961 that provided an opening for congressional critics who distrusted or opposed the Tito regime. A Soviet-Yugoslav trade agreement signed in July projected a continuing increase through 1965 in two-way trade between Yugoslavia and the Soviet Union. In September, 1961, the opening Yugoslav statement at the first summit conference of nonaligned nations hosted by President Tito in Belgrade appeared from the American point of view to be unduly critical of U.S. policy. Moreover, Yugoslavia was instrumental in the conference’s refusal to single out the Soviet Union for criticism for resuming nuclear testing, even though the testing resumed on the very day the conference opened. Coming on the heels of the American-led financial support initiative of late 1960, these Yugoslav steps appeared to some in the U.S. Congress as ungrateful at best or perfidious at worst. Others may have taken the Kennedy administration’s evident intention to expand relations with Yugoslavia as an issue on which to attack the new president, whose margin of victory over Richard Nixon had after all been paper thin. From the Yugoslav side a trade agreement with the Soviet Union made good sense, and anti-U.S. rhetoric may have been seen as necessary, either to stake out a position of leadership in the nonaligned movement or to counterbalance the acceptance of financial assistance from the West, or both. In any event these moves by the Yugoslav government significantly increased the difficulties faced by the Kennedy administration as it sought congressional support for measures that would be helpful to Yugoslavia. In late 1961 Senator John Tower of Texas attacked the training of nineteen Yugoslav airmen in his home state (part of a long-standing program) and the proposed sale of 130 aging jet fighters to Yugoslavia for Soft Loans and Hard Bargaining 67 $1.3 million. The Congress struck down these arrangements despite efforts of the new Kennedy administration to defend them. The adminis- tration was successful against similar opposition, however, in obtaining the passage of a significant increase in Title I sales for 1962-63. Amend- ments introduced by Senator William Proxmire of Wisconsin to the foreign aid appropriation for 1963 had excluded Yugoslavia and several other countries by name, not only from aid per se, but specifically from access to agricultural surpluses. A successful counteramendment by Senator Mansfield of Montana and Senator Dirksen of Illinois nonethe- less saved Yugoslavia from restrictions on Title I sales with language exempting any country “not participating in the program for communist conquest of the world” (read, as participating in Soviet foreign policy).29 The issue of further American aid to Yugoslavia other than PL 480 sales of agricultural products was quickly if rather curtly resolved before the end of 1961. In October, President Kennedy ordered the State Depart- ment to undertake a review of U.S.-Yugoslav relations. The Yugoslavs mistook this review as a challenge rather than the White House effort to preempt the congressional pressure that it was and demanded a formal statement of American policy. At this point Ambassador Kennan advised Yugoslav authorities that, while PL 480 sales could continue, the admin- istration contemplated no other aid to Yugoslavia for the time being. It was evident that the growing American confrontation with Cuba was reducing the flexibility of American policy toward Communist countries, and this, although somewhat illogically, affected relations with Yugo- slavia. President Tito responded publicly with the charge that the United States was abandoning its long-standing practice of not using economic aid to influence Yugoslav foreign policy. Kennedy’s secretary of state, Dean Rusk, denied this charge in testimony before the House of Represen- tatives in February, 1962; he also defended past military aid to Yugoslavia purely on grounds of helping the country preserve its independence.?° Yet no further talk of new aid for Yugoslavia was heard from American officials, beyond the American contribution of $100 million to the $275 million Western aid package of 1960-61 which had facilitated GATT membership. The issue of U.S. aid to Yugoslavia was thus set aside, but a new problem soon appeared on the trade front. The Trade Expansion Act of 1962 was intended to usher in a liberalizing round of multilateral nego- tiations—the so-called “‘Kennedy Round.” By the time the bill reached the floor of the House in June, however, the powerful chairman of its 68 Yugoslav-American Economic Relations Ways and Means Committee, Wilbur Mills, had added an amendment to Section 231 of this otherwise tariff-reducing measure which would have had the effect of denying most-favored-nation (MFN) treatment to Yugo- slavia as well as to Poland, even though neither country was mentioned by name. Actually aimed at Cuba, as was the recently defeated Senate amendment to the Foreign Aid Act banning PL 480 sales, this amendment denied trade concessions to any Communist government, regardless of its independence from Soviet control. Congress was of course reacting to the emergence of the Castro regime, hostile to the United States but not yet fully in the Soviet camp. While the Senate amendment on PL 480 sales was withdrawn, this House bill barring Communist countries from access to MEN did pass during the summer of 1962, well before the Cuban missile crisis of that October. President Kennedy was faced with the unwelcome prospect of end- ing MFN for Yugoslavia. Its removal would double the tariff paid on two- thirds of Yugoslav exports to the United States. Mrn had been extended in 1945 under terms of the 1881 treaty with Serbia and had not been threatened even during the immediate postwar period. It now faced automatic revocation within one year. Before the deadline arrived, the persistent efforts of the State Department and President Kennedy’s per- sonal attention succeeded in attaching a provision ‘‘restoring’”’ MFN for Yugoslavia (it never actually lapsed) to the Foreign Assistance Act of 1963. The Yugoslav side contributed to these efforts by avoiding the sort of tough press statements that had helped to fuel the postwar confronta- tion. Final congressional passage of the ban’s removal did not come until after President Kennedy’s death in November, 1963. Weeks before Ken- nedy was assassinated, however, President Tito paid his first visit to Washington, signaling the administration’s certainty that normal trade relations would continue. Talks between the presidents were strikingly smooth, and Tito came away tremendously pleased. Both agreed that no further American aid to Yugoslavia seemed necessary. Official Yugoslav relations with the United States immediately become more constructive and less formal.31 When President Kennedy was assassinated, the line outside the American Embassy in Belgrade to sign the book of condolences stretched for several blocks for three days running. This indication of popular respect for the slain president bore little relation, however, to his role in bilateral matters such as resolving the first MFN crisis or even the prompt American provision of emergency aid after the Skopje earthquake in July, Soft Loans and Hard Bargaining 69 1963. Yugoslavs, like other Europeans, responded rather to the image of a young and handsome leader who somehow seemed more European than other American presidents. Had he lived to accept President Tito’s invitation to visit Yugoslavia, his presence would have made a still larger contribution to smoothing the course of Yugoslav-American relations. As it was, his attention to Yugoslavia reinforced the favorable impact on economic and other relations that visits to Yugoslavia by leading Ameri- can officials have had ever since the Dulles visit of 1955. Overall the first half of the 1960s saw economic relations between Yugoslavia and the United States approaching a normal commercial basis. Aid had been phased out, apart from PL 480 food sales, and the 1962-63 crisis over MFN had been surmounted. By 1964 dollar sales of American agricultural products to Yugoslavia under PL 480’s Title IV had exceeded the sum of dinar sales or emergency aid under Titles I-III. As noted in Table 3.1, dollar sales made up virtually the entire amount sold in 1965 and amounted to nearly as much as the 1959 record amount provided for dinars under Title I. In 1966 the Findley amendment to PL 480 formally placed all sales on a strictly dollar basis. Dollar sales have continued in subsequent years on substantially better than strictly com- mercial terms, under a variety of programs authorized by subsequent amendments to the legislation. Although the Findley amendment included another brief, also un- successful threat to Yugoslavia’s MFN status, the mid-1960s marked a number of turning points that broadened the basis of Yugoslav-American relations. In August, 1964, final agreements were signed between the Yugoslav government and representatives of both the prewar bond- holders (completing the 1959 arrangments for final payment) and Ameri- can stockholders in the Yugoslav enterprises nationalized after the war. Also in 1964 the Fulbright program for scholarly exchanges was extended to Yugoslavia. Official U.S. aid was winding down, but opportunities for increased trade and other private American commerical involvement were coming into being. Subsequent chapters will examine aspects of an increasingly unofficial range of economic relations. We may conclude the present chapter with a brief account of the official American assistance given to the Yugoslav economy in the post- war period. As can be seen in Tables 3.1 and 3.2, nearly three-quarters of the $2.5 billion in grants, military as well as economic, and net concessio- nal or “‘soft’’ loans extended to Yugoslavia across the entire period 1945— 68 were provided during the decade just reviewed, 1954-64. 70 Yugoslav-American Economic Relations Table 3.2. U.S. Grants and Loans to Yugoslavia, 1946-1984 (U.S. fiscal years, millions of dollars) Program I. Econ. Assist: Total Grants Loans A. Aid and Predecessor Grants Loans> (Sec. Supp. Assist.) B. Food for Peace (PL 480) Grants Loans Title I: Total Repay. in $-Loans Pay. in For. Curr. Title II: Total E. Relief, Ec. Dev. & wFP Vol. Relief Agency C. Other Econ. Assist. Loans Grants Other Il. Mil. Assist.: Total Loans Grants Of which: A. Map Grants© B. Intl. Mil. Ed. Trng. C. Tran-Excess Stock Ill. Total Econ. & Mil. Loans Grants Other U.S. Loans Eximbank Loans All Other UNRRA Relief Period, 1946-48 298.1 298.1 298.1 298.1 298.1 298.1 298.1 Marshall Plan Period, 1949-52 186.8 186.8 124.4 124.4 (109.2) 24.8 24.8 296.1 0.1 13.8 496.8 496.8 55.0 55.0 Mutual Security Act Period, 1953-61 1,038.4 616.7 421.7 453.9 264.7 189.2 (321.2) 584.5 352.0 232.5 394.8 394.8 189.7 47.2 142.5 393.5 4.2 13.8 1,449.9 421.7 1,028.2 49.7 49.7 Source: Agency for International Development, U.S. Overseas Loans and Grants, Obligations and Loan Authorizations, July 1, 1945—-September 30, 1988. (CONG- R-0105), p. 173. Soft Loans and Hard Bargaining 71 Foreign Total Assistance Loans Outstand- Act and Principal ing Loan Period, Grants, Repayments, Balances, 1962-84 1946-88 1946-882 1946-882 536.4 1,734.1 527.0 18.0 91.9 1,188.5 oo — 444.5 545.6 527.0 18.0 a2eD 544.5 130.0 18.0 Pasa 396.3 —_ — 0.4 148.2 130.0 18.0 (10.7) (434.7) 523.9 853.9 397.0 -— 79.8 456.5 — — 444.1 397.4 397.0 a 469.4 585.0 397.0 — 290.9 347.2 347.0 — 178.5 237.8 50.0 — 54.5 268.9 — — 0.1 47.2 oo — 54.4 PRN GL —_— oa — Son os — —_— ae Looe = — —_— 335.7 — os 1.8 723.4 1.0 — 1.4 1.4 1.0 _— 0.4 722.0 —_ a —_— 689.6 — — 0.4 4.9 — — — Qifas —_— — 538.2 2,457.5 528.0 18.0 445.9 547.0 528.0 18.0 92.3 1,910.5 = = 1,162.0 1,240.7 890.0 351.0 974.9 1,052.9 704.0 349.0 187.1 187.8 186.0 2.0 aValues in these columns are net of deobligations. bIncludes capitalized interest on prior-year loans. cMilitary Assistant Program grants. 72 Yugoslav-American Economic Relations The full impact of U.S. assistance on Yugoslavia’s postwar economic development is difficult to estimate in any precise way. For now we may note one calculation that American assistance, broadly defined, covered 60 percent of Yugoslavia’s payments deficits on current account for the period 1950—64 and added perhaps 2 percentage points to a rate of growth in national income during the 1950s which averaged 7.5 percent.32 Yugoslav Growth, Market Socialism, and Economic Relations with the West gums [he evolution of Yugoslavia’s unique economic system since World War II produced a domestic standard of living much higher than most Yugoslavs had experienced in prewar years and created a form of social organization previously unknown in the world. At the same time, in its efforts to create a workable system of market socialism, Yugoslavia has encountered most of the dilemmas with which a variety of rapidly developing economies throughout the world have come to grips and with which Poland and Hungary are now struggling. This special system of decentralized socialism mixed with market forces deserves a chapter of its own because of both its past achievements and its current crisis. Yugoslav relations with the United States have had a significant impact on the emergence and on the substance of this economic system, especially through the receipt of emergency assistance in the years immediately following 1948 and of longer-term aid into the early 1960s. The normalization of bilateral commercial relations from the mid-1960s onward and the intensification of financial relations in the late 1970s and 1980s further influenced the directions in which Yugoslavia’s economic institutions have developed. By the same token the unique features of Yugoslavia’s economic system prompted American businesses, banks, and government agencies to respond with new and innovative ways of dealing with their counterparts in Yugoslavia and in some cases in other countries as well. In this chapter we consider the origins and evolution of the institu- tions and policies that have contributed both to the uniqueness of the Yugoslav economic system and to the uniqueness of the Yugoslav- American economic relationship. We trace Yugoslavia’s rapid economic 74 Yugoslav-American Economic Relations growth during the immediate postwar period and point out some of the weaknesses it masked. In examining that uniquely Yugoslav institution, the independent self-managed socialist business enterprise, we note that it was created as much in response to a political crisis as to economic need. We review the economic reforms of the mid-1960s, a pioneering effort to create a socialist economy working on market principles, and suggest several reasons why it did not succeed. Relevant here are prob- lems in the operations of business enterprises, the ambiguous role of banks, and the decentralization of economic as well as political power. These problems helped set the stage for Yugoslavia’s economic crisis of the late 1980s. With all this in mind, we review Yugoslavia’s trade with the United States and the rest of the world over the past few de- cades. Growth, Reform, and Decentralization — Yugoslavia’s rapid economic growth and industrialization during the first four postwar decades transformed the country from a backward agrarian land (by European standards) to a nation listed in United Nations statistics as one of the world’s ‘‘newly industrializing countries” (Nic). Having fought a traumatic civil war concurrently with a bitter struggle against foreign occupiers, Yugoslavia emerged from World War II with a new Communist leadership. From the start these leaders were committed to rapid economic development based on the extensive growth of state industrial enterprises and on the Soviet pattern of central planning from the 1930s. They were also to some degree dependent on economic success for continuing political legitimacy. Immediately following Yugoslavia’s expulsion from the Cominform and the Soviet economic boycott of 1948, a state of political isolation and virtual economic siege descended on the country, moderated only par- tially by Western (mainly American) economic and military assistance. In this postwar climate virtually all goods were scarce and distributed under some form of rationing. Policies of central economic control and of extreme self-reliance, begun with enthusiasm following the Soviet model in 1945, were hard to abandon. These policies appeared appropriate and necessary at the time, when it was possible to transfer capital and labor from agriculture to promote the extensive growth of industry. They made it much more difficult, however, to turn toward market mechanisms in later years. Yugoslav Growth and Economic Relations 75 Workers’ self-management, Yugoslavia’s unique contribution to so- cialist practice and the theory of industrial democracy, was promulgated in the early 1950s partly out of a need to set Yugoslavia apart from the Stalinist economic system from which it had recently separated. It also represented a reaction against the shortcomings of centralized control over Yugoslavia’s own political and economic institutions.1 The fact that the elements of workers’ self-management had been put in place in the early 1950s made it possible to embark on serious economic reforms in 1965. The goal of these reforms was to raise the productivity of labor and of increasingly limited supplies of capital and thereby to turn the corner from extensive to intensive growth. These reforms, as we shall see, tried to improve the efficiency of Yugoslav business enterprises by exposing them to international standards not only through greater domestic com- petition but also through expanded foreign trade and investment. By the end of the 1960s, however, it was clear that the reforms had not achieved their goals. Factors underlying opposition to the reforms included popu- lar pressure for wages set by standards of egalitarianism rather than productivity, as well as reactions throughout the country against concen- trations of capital in Belgrade-based banks and trading enterprises. Politi- cal crises followed in the early 1970s. These were resolved in part by further decentralization of both political and economic power, but still without a successful transition to reliance on competition and the mar- ket mechanism. All of this left Yugoslavia in a weak position to with- stand either the oil price shocks of the 1970s or the financial crises of the 1980s. One can find in the experience of Yugoslavia over the past four decades the interplay of dilemmas familiar to development economists everywhere—extensive versus intensive growth, self-reliance versus in- volvement in the world economy, egalitarianism versus efficiency, and centralization versus decentralization. The struggle with these dilemmas was more open in Yugoslavia than in Eastern Europe, at least until the late 1980s, when movements toward political reform in Poland, Hungary, Czechoslovakia, Bulgaria, Romania, and the Soviet Union itself led to widespread public discussion of economic problems in those countries. All of these issues have been significant in the shaping of Yugoslavia’s domestic institutions and of its economic relations with the rest of the world, and all of them remained of vital importance in the evolution of Yugoslavia’s economic choices through the 1980s. 76 Yugoslav-American Economic Relations Rapid Growth, “Extensive” Development, and Autarky As noted at the end of the previous chapter, rapid growth was a charac- teristic of the Yugoslav economy during most of the years following World War II. The exceptions were the earliest years of separation from the Soviet bloc (2.0 percent average annual growth in 1948-1952) and the entire decade of the eighties, which began with several years of world recession.” During the twelve years following 1952, however, when rapid industrialization and extensive growth were the order of the day, Yugo- slavia’s annual economic growth rate was one of the highest in the world. Overall Yugoslavia’s annual rate of economic growth from 1947 to 1985 averaged 5.4 percent, for a sevenfold increase in gross social product (nearest equivalent to GNP) over the period (see Table 4.1). Several factors contributed to Yugoslavia’s remarkable postwar eco- nomic growth rates. European recovery and international economic con- ditions in the 1950s favored growth in Yugoslavia as in many other countries. American assistance, provided one important source of capi- tal; forced domestic saving provided even more. Despite their generally low standard of living by European standards, most Yugoslavs were still Table 4.1. Average Annual Growth Rates of Yugoslavia’s Gross Social Product (in real terms, percentages based on 1972 prices) Social Private Other Year Total Sector Sector Industry Agriculture Activities 1948-85 5.4 6.3 Paha) 7.8 2.4 5.4 1948-52 2.0 4.3 = 74,3} 5.4 S744) 4.4 1953-65 8.1 9.4 4.5 12.0 4.7 7.7 1956-65 7.4 9.8 4.5 12.0 ZA 7.7 1966-75 5.8 6.3 3.8 6.6 Bil 6.2 1976-80 5.6 6.2 74 Pe 6.9 200 5.8 1981-85 0.6 0.7 0.1 2.7 0.6 way Source: Federal Statistical Office, Yugoslavia 1945-1985: A Statistical Survey (Belgrade, 1986), p. 74. aThe Yugoslav Gross Social Product (csp) is the aggregate sum of Yugoslav goods and services produced in a given year. It corresponds to the American concept of Gnp in most respects but omits certain services considered to be “‘non-productive”’ and is therefore approximately 15 percent lower than American-style cnp calculations would produce. Yugoslav Growth and Economic Relations 77 willing to forego personal economic gain as they had been obliged to do in the immediate postwar period. Most of them had lived under very modest circumstances before the war. They had survived devastating wartime conditions and had seen hopes for rapid economic progess dashed when the first Five-Year-Plan had to be abandoned in 1948. Even after the split with the Soviet Union, therefore, they were willing to postpone increased consumption in favor of investment in industrial facilities that promised future economic gains.* All of these factors combined to generate support for a high level of investment, which worked dramatic changes in the structure of the Yugoslav economy. The nature and extent of these changes can be seen in Table 4.2. Spurred by investment during the decade encompassing the second half of the 1950s and the first half of the 1960s, the Yugoslav economy grew very rapidly in terms of national product, industrial production, employment, and enterprise income. As in other less developed coun- tries, a low starting point contributed to these impressively high rates of growth. At the same time this phase of development revived the eco- nomic, political, and psychological optimism of the immediate postwar period. Agriculture was being sorely neglected, but the migration of labor Table 4.2. Structural Changes in the Yugoslav Economy, 1947-1984 (percentages; overall social product = 100) Sector of Activities 1947 1952 1960 1965 1970 1975 1980 1984 Primary Sector “vy arb alll h ileys IG Pe wallop ae Ey lay7/ Agriculture Se BOR ey bye alsa alt) GIB R= ale) Forestry 4.9 eie7/ Ae) 2 1.1 1.0 0.8 0.9 Secondary Sector 37,6, 39'5) 44-4) 747-6) 48:0) 5015) 53:2) 53-5 Manufacturing TSG) 2127" 26:45" 3452" 33.6) 37.0) 3S 4272 Building and Constr. Up ysy alyA5) OS Ose oe LO oes nO 7.9 Crafts 6.0 5.3 3.4 Soul 3.1 322 3.1 3.4 Tertiary Sector w7/fs} AAO) AX) UE GS) VAS) = SPAS} ai 0 his} Transport and Commun. 5.0 6.8 8.2 8.0 8.6 8.6 8.4 8.6 Trade and Catering WOE) WIG, ay AION aL OY eZ ICM) Other Activities — 225 2.8 By S\Al ial 3.5 3.3 Source: Federal Statistical Office, Yugoslavia 1945-1985: A Statistical Survey (Belgrade, 1986), p: 75. aCalculated at 1972 prices. 78 Yugoslav-American Economic Relations from stagnant rural areas to the cities did provide the workers needed to build industrial plants, railways, highways, and new urban centers, all very visible signs of economic progress. Even though the progress achieved in some segments of the economy was modest in absolute terms, it was exceptionally visible at the margin, where it was valuable politi- cally as well as economically. The rapid economic growth achieved during this period was exten- sive in nature (i.e., flowing from increased inputs of labor and capital) rather than intensive growth based on rising productivity. It took place under a policy of autarky, or economic self-sufficiency, in which a conscious effort was made to do without products from other countries as much as possible. This inclination toward autarky was deeply ingrained in the minds of Yugoslav decisionmakers, especially among party leaders, who had looked to the Soviet experience as the only valid model for building a socialist economy.® The pre-World War II Soviet preoc- cupation with being isolated in hostile surroundings, while endowed with a broad range of natural resources, greatly affected the economic policies pursued by other Communist parties after they came to power in countries lacking such an endowment. This notion of autarkic develop- ment gained further strength among the leaders of the Yugoslav Commu- nist party after the events of 1948 when Yugoslavia was practically isolated from both East and West. The insistence on development of domestic industry at almost any price was an understandable response to this perceived need for economic self-reliance and development. It was also aimed at increasing factory employment and bringing about changes in the occupational and economic status of the population. Thus pro- tected from the economic influences of the outside world, however, the Yugoslav economy made its advances without taking into account some important economic factors, including the calculation of comparative costs (i.e., the cost of producing specific goods, stated in terms of other goods that might have been produced with the same resources). Under the circumstances we have described, the Yugoslav leadership in the 1946-50 period perceived a continuing need to develop an effec- tive centralized management of the economy. To do so they tried quite logically to reduce the impact of potentially negative factors that were beyond the influence of central planners. In an underdeveloped, predom- inantly agricultural country, this most important sector of the economy was not subject to the planners’ control. Harvests depended on climatic conditions rather than the planners’ calculations, and efforts to increase productivity through collectivization ended in failure. The world market Yugoslav Growth and Economic Relations 79 could also introduce unpredictable variables into the functioning of the economic mechanism. Perhaps it is not surprising, therefore, that agricul- ture was not developed effectively and the role of foreign trade—seen as a necessary evil—was reduced to the absolute minimum. The text of the first Five-Year-Plan asserted that the role of foreign trade was to import goods and services that could not be produced in the national economy, while the role of exports was to pay for those imports.® Even after the official rejection of autarky in the new platform of economic and social reform adopted in 1965, some commitment to the concept remained ingrained in the thinking of many of Yugoslavia’s economic authorities. All too frequently resources continued to be allot- ted without taking comparative costs into account, and many firms continued to survive which had never been economical in the sense of being able to supply goods competitively either for domestic or foreign markets. The full costs of building an economy exclusively on the basis of internal considerations could only be seen in later years, as the Yugoslav economy became oriented increasingly toward world markets and the extent of direct and indirect subsidies to inefficient enterprises became apparent. A New Road to Socialism after 1950 Workers’ self-management, one of the world’s most daring and innova- tive experiments in social and economic organization, came into being at a time of extreme economic and political crisis. By 1950, when the initial legislation was passed, the Five-Year-Plan begun in 1947 under assump- tions of Soviet assistance had ground to a halt. Yugoslavia was instead suffering the impact of a Soviet economic blockade, ideological attacks, and even military threats. Ideologically the Yugoslav leadership felt compelled to justify its break from Stalin in Marxist terms, on pain of losing its Communist legitimacy. At the same time, as Milovan Djilas later recalled, ‘“The country was in the stranglehold of the bureaucracy,” and the party leaders were appalled at the arbitrary nature of the machine they had created. Early in 1950, according to Djilas, after some rereading of Marx’s Capital, he and fellow Politburo members Edvard Kardelj and Boris Kidri¢ began to discuss the possibility of implementing in Yugoslavia the Marxian concept of a ‘‘free association of producers.” As they envisioned it the workers could control the factories through ‘“‘workers’ councils,”’ groups that had been established in 1949 as advisory bodies. When they 80 Yugoslav-American Economic Relations presented their ideas to President Tito, he was skeptical at first, but Djilas and Kardelj pressed him hard, stressing that ‘‘this would be the beginning of democracy, something that Socialism had not yet achieved; further, it could plainly be seen by the world and the international workers’ move- ment as a radical departure from Stalinism.’’”? Tito was persuaded, and the implementing legislation was prepared. In presenting the new law to the Yugoslav parliament, Tito rejected the Stalinist model of state social- ism as a ‘“‘deviation”’ and proclaimed workers’ self-management as Yugo- slavia’s separate “‘road to socialism.’’8 The tasks undertaken with the passage of the new law were formida- ble. They included not only the creation, during a period of intense international crisis, of an economic model that had never before been put into practice but also the transition to such a model from a rigid Stalinist one that was itself on the brink of collapse. In the years immediately following World War II, the Yugoslav economy had been controlled by the government under a rigid system of state socialism. Banks and busi- nesses were instrumentalities of the state; production, trade, and finance were state activities, and business assets and properties were state prop- erty. It was the duty of enterprises and banks to implement the central government’s economic plans, both in the use and allotment of material resources and in the allotment of financial resources. State supervisory bodies appraised and evaluated the performance of enterprises or banks in terms of their success in performing their assigned tasks under the state economic plan. Any profits earned were remitted to the state, which also had to cover any losses. The only area for the exercise of separate initiative by enterprises was in implementing tasks and targets? within the plan. The Law on Workers’ Self-Management passed on June 27, 1950 (by formal title the Law on the Management of State Economic Enterprises and Higher Economic Associations by the Work Collectives)!° created both a new form of business enterprise and a new form of property own- ership. Under this law its subsequent amendments and several decades of evolution, business enterprises that were formerly responsible to and supervised by federal ministries in charge of their industrial sector gradually became independent in their operations. They were now gov- erned by directors and by workers’ councils. The latter were from the beginning chosen by secret ballot in elections involving all the workers employed in the enterprise. From 1969 onward directors have been elected by the workers’ councils and held responsible to them as profes- sional managers. Among their legally prescribed duties, they are required Yugoslav Growth and Economic Relations 81 to cooperate with the workers’ councils in business decisions and opera- tions. (In Yugoslav terminology the term ‘‘worker’”’ refers to both ‘‘blue’’- and ‘‘white’’-collar workers.)!1 Business property (the so-called ‘“‘means of production”’ in classical Marxist theory) does not belong to the state, nor to the individual workers; it is ‘“social property.” It is “owned” by the society at large and used/operated/administered on society’s behalf by the workers in each enterprise who, in their collective capacity and through their elected workers’ councils, act as trustees of the property for the body of Yugoslav society.12 Private property also came to play a significant economic role in Yugoslavia. The right of individual Yugoslavs to own personal property (including automobiles) and their own dwellings (including vacation homes) is unquestioned. Since the abandonment of forced collectiviza- tion of agricultural land in 1953, private holdings have increased to 86 percent of all farmland. Individual holdings were limited until 1988 to 10 hectares (about 25 acres), with exceptions for upland pasturage and mountain land, which could be larger. Small private businesses active in the services sector—mechanics, artisans, taxis, restaurants, inns—were allowed to employ up to five workers. (The recent reforms that raised the limits on agricultural acreage and the number of employees allowed to private establishments will be discussed below.) From 1947 to 1985 the private sector, although tiny compared with the social sector, maintained the same average annual growth rate, 6.3 percent. Attempted Economic Reform in the 1960s The Yugoslav economy maintained an impressively high rate of growth during the years 1953-1965. Nevertheless, both economists and other Yugoslavs were becoming aware by the early 1960s that the fast-growing extensive development model of the Yugoslav economy was not produc- ing the desired results. It was not enough that the Yugoslav economic system was different from both the Soviet system and the Western free- enterprise system; it also had to deal with both systems and compete successfully with the latter in world markets. Also direct signals were coming from world markets that the Yugoslav system was not measuring up to Western standards of efficiency.14 Its high growth rates reflected extensive development, based on almost indiscriminate industrialization that relied on cheap labor from the countryside and on investment from forced savings. The challenge to Yugoslav economic authorities was to convert this 82 Yugoslav-American Economic Relations rapid growth into intensive development that, through greater efficiency, would generate more competitive exports and permit a higher level of consumption. With the economic reform measures enacted in the mid- 1960s, they sought to create an unprecedented model of a market socialist economy in which independent enterprises, managed by their workers, would act in response to the forces of the marketplace. They hoped through these new conditions to raise labor productivity and to force the allocation of productive resources more efficiently, with real costs taken into account. With Yugoslav producers subjected to the pressures of international competition in both foreign and domestic markets, they expected the law of comparative advantage to force a concentration of efforts into areas of greatest efficiency. The 1950 Law on Workers’ Self-Management established the socialist business enterprises as independent entities.15 In theory at least this established a unique possibility of creating the elements of a market socialist economy. In 1965 a package of economic reform laws and regu- lations was promulgated to strengthen the independence of these enter- prises, to give them more economic power and incentives to become the principal actors on the economic stage, and to expose them to the operation of market forces both foreign and domestic. This was done chiefly by addressing the economic circumstances and environment in which the enterprises operated rather than by introducing major changes into the organizational! structure of the firms themselves or their links with the local party structure. Among the elements of the 1965 reform package were changes in the tax laws, adjustments in the price system, a currency devaluation and reform, and the establishment of new regimes in the areas of foreign trade, customs tariffs, and the allocation of foreign exchange. The main thrust of these reforms was an effort to bring the working of the Yugoslav economy more into line with world economic standards. Two other significant measures, the legalization of foreign capital investment and the independent choice of managing directors by the enterprises themselves and not by the local party leaders, followed in 1967 and 1969 respectively. The changes in the tax laws that were adopted as a part of the 1965 economic reforms directly affected the enterprises. Tax reductions left more funds with the firms while at the same time reducing the resources available to the federal government for investment. The reformers ex- pected the business sector to invest such funds in response to demands of the marketplace. To correct serious distortions in the price structure, the artificially low prices of raw materials and farm products were raised Yugoslav Growth and Economic Relations 83 toward market levels. Other prices, particularly in the tertiary sector, were freed from state control, with world market prices again taken as the guiding criteria. To a considerable extent, monetary and credit policy and regulation of the banking system replaced direct administrative interven- tion by the federal government in implementing national economic and investment policies. Currency, Customs, and Foreign Exchange Reforms A currency reform was enacted in 1965 to establish a realistic exchange rate between the Yugoslav dinar and Western currencies and open the way for more realistic pricing of Yugoslav exports and of foreign goods being imported into Yugoslavia. A ‘‘new dinar’’ was created with the value of 100 old dinars and an international parity of 12.5 new dinars to the U.S. dollar. (The old dinar had been valued at 750 to the dollar.) The new exchange rate made Yugoslav export goods less expensive by 40 percent in foreign markets while raising the domestic (dinar) price of imported products. A new foreign exchange regime was established which offered ex- porting enterprises the incentive of retaining 20 percent or more of their export earnings in the form of foreign exchange, which they kept in special accounts in Yugoslav banks. Enterprises were also allowed to carry out self-financing operations in foreign currencies, allowing them greater flexibility in transactions with foreign partners. An interbank foreign exchange market was established, to which Yugoslav commercial banks were given access together with the National Bank of Yugoslavia. Establishing a realistic dinar value for Western currencies, albeit in a limited market, was seen as a major step on the road toward the interna- tional convertibility of the dinar, which was believed in sight by the early 1970s.1© Unfortunately, the goal of convertibility was not realized. Fail- ure to complete this part of the reform would contribute greatly to future economic problems, including the domestic allocation of scarce foreign exchange and the adjustment of foreign exchange rates.17 The legislation of 1965 also established a permanent customs tariff and a regime under which foreign exchange could be obtained to pay for imports. This gave a new predictability to Yugoslavia’s import regime and met one of the requirements for Yugoslavia to join Gatr. Under the previous state trading regime, both customs tariffs and the availibility of foreign exchange to pay for imports had been set on an ad hoc basis by administrative decisions, reflecting the continuing official desire to con- 84 Yugoslav-American Economic Relations trol external factors in Yugoslavia’s economic development. The adop- tion of these measures, followed by Yugoslavia’s accession to full GaTr membership on August 25, 1966, represented a significant victory at the time for those in the Yugoslav leadership who opposed autarky and favored an economy more open to the outside world. The tariffs adopted in 1965 represented an average reduction of approximately 50 percent from previous rates, for an average ad valorem tariff rate of 11 percent after the reform.18 The new regime for import licensing established categories on the basis of domestic need and other considerations. If stated criteria were met, foreign exchange would be provided to pay for imported goods in a long list of categories.19 On the export side virtually all exports were liberalized, with export licenses required only for (1) goods scarce on the domestic market or necessary for health or national security reasons, and (2) exports to ‘clearing arrangement’ countries, including the Soviet Union, to be minimized versus exports to hard currency countries, since sales to the former were generally much easier to make. Despite the continuation of significant import limitations and licensing require- ments, the trade reform measures of 1965 represented a considerable liberalization of imports and thus allowed world market forces substan- tially greater influence within Yugoslavia than had previously been the Gdaserce Seeking Foreign Capital As the 1965 economic reform measures were being prepared, the view was gaining support among Yugoslav leaders that reform should also include opening the Yugoslav market to foreign capital investment. Such investment, the argument ran, would attract new technical, managerial, and marketing know-how as well as financial resources. Foreigners, by choosing freely among the various industrial sectors for investment, could help identify the areas of Yugoslavia’s greatest comparative advan- tage. Nevertheless two years elapsed between the passage of the reform legislation in July, 1965, and the enactment of the foreign investment law of July, 1967. There was, after all, no modern precedent in any socialist country for such a dramatic departure. Some Yugoslav officials and economists feared that such ‘‘capitalist’”’ investment would pose a threat to socialism and to Yugoslavia’s special system of self-management. These misgivings had to be addressed, as well as those of potential foreign investors. A joint Yugoslav-American seminar was held in Bel- Yugoslav Growth and Economic Relations 85 grade from June 10 to 12, 1967, during which foreign businessmen were invited to comment on legal provisions then being drafted in the federal parliament. Some Yugoslav participants in the seminar were also mem- bers of the parliamentary drafting committee and kept the committee apprised of the seminar’s deliberations. The legislation that was passed in July, 1967 (actually a set of amendments to several existing laws), pro- vided for investment under contractual arrangements between foreign investors and existing Yugoslav enterprises. The contract would define the scope of their joint endeavor under a joint management board and would stipulate their respective responsibilities and shares of investment and profit (with the foreign investor limited to a maximum of 49 percent). Contracts would have to be approved by the federal Secretariat for the Economy, and certain areas such as banking, insurance, and internal commerce were excluded from foreign investment.21 Some observers were initially doubtful. Was the new framework broad enough to attract significant foreign investment? This skepticism appeared justified as new “‘joint ventures” were slow in materializing. The first amendments to the legislation, designed to make its terms more attractive, were adopted in 1970. Others have followed over the years. Further results of Yugosla- via’s foreign investment legislation are examined in the next chapter. Aftermath of Reform The reform measures of the 1960s were aimed at opening Yugoslavia’s economy to world market forces and at forcing its enterprises to become more efficient by facing increased foreign and domestic competition. Unfortunately these efforts were not completed. The failure to achieve a convertible dinar left the Yugoslav economy’s linkage to the world market subject to complex and changeable foreign exchange rules and transactions. Domestically, efforts to promote efficiency were undercut by the continued practice of shielding weak enterprises from the conse- quences of failure. Nevertheless, the enactment of even these partial reforms represented an important victory for those Yugoslavs who were seeking to create a socialist market economy that would be open to the rest of the world. In the Yugoslavia of 1965, for the first time since World War II, passage of these measures affirmed the proposition that economic relationships with other countries were not merely a ‘‘necessary evil” but carried the positive potential to increase Yugoslavia’s efficiency and prosperity. There were also political and social consequences from this eco- 86 Yugoslav-American Economic Relations nomic victory. To the extent that the economic reform of 1965 strength- ened elements of choice, even in Yugoslavia’s limited market, it also tended to promote some political liberalization.22 Opening the Yugoslav economy to the outside world tended also to open the society. From the beginning of the sixties, passports were issued much more readily to Yugoslav citizens desiring to visit foreign countries as tourists or to seek jobs abroad. After 1965 great numbers of Yugoslav citizens went abroad for both purposes. Under reform-mandated pressures for greater effi- ciency, openings for employment in the Yugoslav economy were less widespread. These pressures led many workers to seek jobs abroad. The demand for foreign labor in West European countries was rising with the economic boom of the 1960s, and many Yugoslavs joined the northern migration of workers from the Mediterranean area. By 1973 the number of Yugoslavs working in West European countries reached 1.3 million.23 The enactment of the reform measures of 1965 prompted different reactions in different parts of Yugoslav society, both in the leadership and the population at large. Even such a limited strengthening of market forces revealed many prior examples of irrational economic activity—of enterprises that had been badly located, inappropriately equipped, or inadequately staffed. Those in established positions found increased competition threatening, but individuals or firms capable of conducting profitable operations welcomed it. The latter demanded a speedy and more vigorous follow-up to the 1965 measures, while the former urged a halt, even a reversal, of the new trends they saw as endangering values such as security, equality, and even social stability in the country. One of the strongest criticisms aimed at the reform measures was that they increased the economic disparities that already existed in the Yugoslav economy—among individuals, enterprises, branches and sec- tors of industry, and among different regions of the country. Yugoslavia’s multinational character added an additional complicating factor. Ethnic divisions within the country coincided with regional disparities as great as those between some European and most poorer developing countries. Steps taken toward serious economic reform actually increased these disparities. The spread between highest and lowest average wage levels in Yugoslavia reached its maximum in the years 1965-68, with a ratio of 8 Lome As student protest swept Western Europe in 1968 for a variety of reasons, Belgrade university students also demonstrated, motivated in large part by the issue of economic inequality, which they saw as being exacerbated by the reform, as well as by other regional and ethnic issues. Yugoslav Growth and Economic Relations 87 Added to student unrest was the fact that Yugoslavia’s regional, eco- nomic, and ethnic differences were strongly represented politically through its various republics and provinces. At the end of the 1960s the Yugoslav leadership thus saw itself facing a serious dilemma that has since confronted other socialist countries, notably Poland and the Soviet Union, and that returned with a vengeance in Yugoslavia in the 1980s. If it persevered in strengthening the market mechanism, the regime feared that it might raise social and regional discontent to dangerous levels. If it tried to avoid these risks by watering down potentially divisive economic policies, it would reduce the chance for genuine economic development based on well-functioning market forces. In practice short-term political concerns prevailed over the long-term economic needs. After the “hot summer of 1968” the government modified its incomes policy, and the spread between the highest and the lowest incomes was narrowed from a ratio of 8 to 1 to 5 to 1.24 Thus the political leadership of Yugoslavia, believing that it faced a choice between rewarding productivity or main- taining social peace, opted for the latter. The question of rewarding productivity increases with higher incomes (and penalizing poor produc- tivity with lower incomes) was put aside. Unfortunately, external events tended to blur the need for reform. Yugoslavia benefited first from the West European economic boom of the late 1960s, with its high demand for Yugoslav workers as well as exports, and then from the easy availability of petrodollar credits in the 1970s. Essential elements for the real working of market forces in the economy, such as an end to local subsidies, effective limitations on credits to the enterprises, and tight bankruptcy laws, were not put in place. As we shall see, the constitutional amendments of 1971 and the Constitution of 1974, by decentralizing many of the powers of government, increased the possibilities for local political interference in business matters at the same time that they weakened the federal authorities’ ability to carry out effective macroeconomic policies. Thus the economic reforms of 1965 were never completed and cannot be called successful. Still they marked a watershed in economic policy and practice in post-World War II Yugoslavia in turning away from a government-led and administered economy. Unfortunately they did not succeed in creating an econ- omy ruled primarily by market forces, and thus Yugoslavia was left in some respects with the worst of both worlds. Several specific aspects of Yugoslavia’s uncompleted economic reforms will emerge as we ex- amine the roles of its business enterprises and banks over the years since 1965. 88 Yugoslav-American Economic Relations A Fragile Prosperity and Inefficient Enterprises The process of decentralizing control over business activities had started slowly after the 1950 adoption of the Law on Workers’ Self-Management, which gave some independence and managerial responsibility to enter- prises and banks while it reduced somewhat the state’s direct control over economic life. Following the reform measures of 1965, the role of the individual firms and their workers’ councils was further strengthened in 1969 when the right to choose enterprise and bank directors was formally taken out of the hands of the local political authorities and given to the enterprises and banks themselves.25 There remained, however, an infor- mal but very close control exerted by party units over nominations for the most important positions in business and banking enterprises, especially for managing director. Conflicts over the choice of managing director of an enterprise between the workers’ council on the one side and the local committee of the League of Communists on the other were not uncom- mon. In a notable 1983 case, a popular and successful general manager, Djordje Scepancéevic of the Novi Sad firm Jugolat, was overwhelmingly favored for reelection by the firm’s workers, but the city party committee tried to veto him, openly pressing Jugolat’s workers’ council to dump Séepanéevic. What made the incident newsworthy was the fact that the workers reelected their man despite the city party committee’s opposi- ton.25 The record of workers’ councils in exercising an effective managerial role was uneven. Workers’ councils generally found it much easier to distribute profits than to deal with losses, inefficiency, mismanagement, overemployment, or the need to face liquidation or bankruptcy proceed- ings. In fact the workers faced a conflict of interest. Their duty as comanagers was to cut costs and achieve a high level of efficiency, but as members of the enterprises’ rank and file they had a natural bias toward full employment and maximum wages. Local political authorities also had a vested interest in keeping the enterprises afloat. To the extent that politics, prestige, or demands for more jobs had played a role in placing a factory in a given locality, the same forces would be aligned against closing it down. Moreover, even when firms were in the red, they paid taxes to the local government. If they were liquidated then the local governments not only lost tax revenue but also had to pay increased unemployment benefits. For this reason it was far more common to see a failing firm merged with a more successful one than to see it shut down. Yugoslav Growth and Economic Relations 89 Indeed the Yugoslav economic system was said by some to have more ways to keep a firm afloat than those provided under the U.S. bankruptcy laws! Not surprisingly then some enterprises established during the period of autarkic “‘self-reliance,’’ when comparative costs were not taken into account, continued in later years to fall even further behind world standards of efficiency and were not able to compete effectively in the world market. Such “political factories” often represented major invest- ments and presented both political and economic challenges to the authorities.27 The Ambiguous Role of the Banks Banks have occupied an ambiguous position in the Yugoslav economy for most of the postwar period. On the one hand they have been viewed with socialist suspicion as potential parasites and agents of exploitation, barely tolerated as a necessary evil for the services they render as adjuncts to the “‘real’’ business enterprises producing socially valuable goods and services. On the other hand they have been encouraged and at times required to play a strong, even entrepreneurial role in Yugoslavia’s eco- nomic development, industrialization, and foreign economic relations and to act much as banks do in the Western market economies. The evolution of Yugoslavia’s present-day banking system has thus been closely intertwined with the contradictions of the country’s postwar development. In the immediate postwar years, when Yugoslav socialism followed the Stalinist pattern, banking was a state activity. The National Bank of Yugoslavia (NBy) headed a nearly monolithic banking system and con- ducted all international banking. After the Yugoslav economy began to move toward a system based on independent self-managed enterprises in the early 1950s, parallel changes also took place in the banking system. In 1955 three ‘‘specialized banks” were established in Belgrade by decree of the Federal Executive Council: The Yugoslav Bank for Foreign Trade—Jugobanka (Jugoslovenska Banka Za Spoljnu Trgovinu); the Yugoslav Investment Bank—Investbanka (Jugoslovenska Investiciona Banka), and the Yugoslav Agricultural Bank—Poljobanka (Jugoslovenska Poljoprivredna Banka). These banks were established as state instrumen- talities in order to relieve the National Bank of commercial banking functions in the areas of foreign trade, industrial investment, and agricul- ture, respectively. The first of these specialized banks to open for busi- ness was Jugobanka, the Bank for Foreign Trade. In 1956 it notified 90 Yugoslav-American Economic Relations foreign banks that it had ‘commenced business operations with foreign countries” and had for its customers “‘all Yugoslav enterprises dealing in foreign trade.” In its telex to the Chase Manhattan Bank of New York, it added, ‘‘We shall be very glad to entrust you the execution of all our orders in your country.’’28 Both the Bank for Foreign Trade and the Agricultural Bank, which opened in 1958, conducted their operations from Belgrade, with representative offices located in the republic and provincial capitals throughout the country. Of the three specialized banks, Investbanka played the most promi- nent role in allocating resources, including foreign exchange, to indus- trial investment projects throughout Yugoslavia. Before 1954 the federal government allocated such resources directly, first as grants from bud- geted funds and then as credits through the General Investment Fund (ciF) created in 1953.22 Administration of the fund was transferred to the National Bank in 1954 and to the Investment Bank when it began operation in 1956.29 Allocations from the fund were also used to capital- ize the Bank of Foreign Trade in 1956 and the Agricultural Bank in 1958. Within federal planning guidelines (called “‘basic proportions”) for sectors and republics, the Investment Bank endeavored to allocate indus- trial investment resources effectively throughout the country. Competi- tion for funds was keen. Loans were awarded to enterprises on the basis of competitive presentations of profitability; economic analysis was sup- ported by relatively well-staffed technical departments and, according to bank officers of the period, was carried out without political interfer- ence.3! Foreign bids to supply equipment were also judged compet- itively. Enterprises seeking loans for a project were required to provide partial funding from their own resources and to take responsibility themselves for any cost increases. During the reforms of 1965, the federal government’s Gir was liquidated and merged into the resources of the Investment Bank and (to a lesser extent) the other two specialized banks. All three were then constituted as commercial banks. Foreign banks and export guarantee agencies were not sure how to deal with Yugoslav banks generally or with the specialized banks in particular. Some Western banks assumed or sought assurances that obligations of the specialized banks were backed by the full faith and credit of the Yugoslav government and were in effect sovereign obliga- tions. Before 1967, for example, Eximbank of the United States accepted the guarantee or direct obligation of the specialized banks more or less interchangeably with that of the state’s National Bank. When it became clear to the management of Eximbank that the Yugoslav authorities no Yugoslav Growth and Economic Relations 91 longer regarded the specialized banks as governmental entities but as commercial banks, Eximbank sought National Bank guarantees, which it required throughout 1967. The American Embassy in Belgrade argued that this Eximbank practice ran counter to the U.S. policy of encouraging Yugoslav movement away from a state-controlled economy,?2 and in 1968 Eximbank resumed the acceptance of specialized banks’ obligations and guarantees without a National Bank “‘super-guarantee.”’ From 1965 onward selected Yugoslav business enterprises had been authorized to borrow abroad through their own commercial banks or under their guarantee, without the further guarantee of any federal au- thorities. As a practical matter, however, many foreign lenders required the guarantee of one of the centralized ‘‘specialized’’ banks—Jugobanka, Investbanka, or Poljobanka—or of the National Bank itself. Eximbank, as noted above, normally required such guarantees.33 In the early 1970s the system of specialized banks began to draw criticism, as did other manifestations of centralized economic and finan- cial power. Pressure was building to disperse this power throughout the country, and by the end of the decade, a wholly new system was in place. Meanwhile, dissatisfaction had been rising in the various republics, particularly in Croatia, over the fact that many decisions on industrial investment in the country—and much of the financial power to back up those decisions—were centralized in Belgrade, the capital of Serbia as well as of the Yugoslav federation. The Constitution of 1974 mandated banking reforms to decentralize this power. Among the changes implemented was the dismemberment of the Yugoslav Investment Bank, which had branches in each of Yugo- slavia’s republics and provinces. Each of these branches was divested from the main bank in Belgrade and became an independent bank responsible for financing industrial investment within its own republic. These banks were all authorized to do foreign business, including bor- rowing from foreign sources. Some of them took new names; others merged with existing banks. In most cases they became the major banks in their respective republics and later the nuclei of the new associated bank systems (‘‘Udruzene Banke’’) discussed below. Banks that traced their lineage in whole or in part to the break-up of Investbanka included the Union Bank of Belgrade—usps (Udruzena Banka Beograd); the Bank of Kosovo (Kosovska Banka); the Bank of Ljubljana (Ljubljanska Banka); the Commercial Bank of Sarajevo—rss (Privredna Banka Sarajevo); the Com- mercial Bank of Skopje (Stopanska Banka Skopje); the Investment Bank of Titograd—st (Investiciona Banka Titograd); the Bank of Vojvodina (Vo- 92 Yugoslav-American Economic Relations jvodjanska Banka); the Commercial Bank of Zagreb—psz (Privredna Banka Zagreb); and its successor, the Union Bank of Croatia—usBH (Udruzena Banka Hrvatske). Ironically, the Investment Bank itself, once its branches were gone, became in 1978 a constituent bank of the Union Belgrade Bank (uss), as did the Agricultural Bank. Decentralization of the financial system facilitated the spread of lax credit policies and practices. Regional banks were often closely con- nected with local politicians who influenced the choice of bank and enterprise directors and obtained investments in their own localities. In the late 1960s enterprises also greatly increased the practice of extending credits to each other, without effective monitoring or restraint. These lax credit policies, coupled with the general prosperity in Yugoslavia and the world in the 1960s and 1970s, blurred the distinctions between profitable and unprofitable enterprises. A rising tide was lifting all boats, whether they were seaworthy or not. Increasing investment, employment, and personal incomes (both nominal and real) stimulated a climate of opti- mism and expectations of higher living standards that would persist in some degree until they were dashed by the economic crises of the 1980s. The Constitution of 1974 and Problems with Decentralization The new Yugoslav Constitution of 1974 carried on the process of de- centralization of political and economic decision making by reducing the functions of the federal government and its instrumentalities while strengthening those of the localitites, republics, and provinces. Al- though it paid lip service to the indispensability of a functioning unified Yugoslav market, the strengthened economic role it gave to political subdivisions—republics, provinces, and even communes—was in prac- tice a major factor in fracturing the market and allowing economic barriers to be erected along republic, regional, and even communal lines.34 The Constitution of 1974 strictly limited the role of the federal government to those specific functions declared to be within its compe- tence. It also required the federal government to obtain the consent of the republics and provinces before it could take certain designated actions. Other matters were to be decided by agreement among the republics and provinces through so-called social compacts negotiated between govern- mental and ‘“‘social’’ organizations, including enterprises, chambers, trade unions, and others. Questions to be determined by social compacts Yugoslav Growth and Economic Relations 93 included the planning of economic and social development, problems related to income and income distribution, employment policies, and Yugoslav external economic relations. Such agreements thus dealt with vital interests of the entire country, but they did not have the force of law, and there were no penalties, except moral or political sanctions, for violating them. Action on initiatives from the federal government in these areas bogged down, not only because negotiations were lengthy, but also because no one could be held responsible for inaction. Another type of governing mechanism established by the Constitu- tion of 1974 was the so-called self-management agreement (sMa). Parties to such agreements were governmental and sociopolitical organizations, enterprises (and “‘basic’’ units within enterprises), economic chambers, and economic associations. Self-management agreements had the force of law and could be enforced by legal action brought by signatories in the Court of Associated Labor. These two instruments, social compacts and sMAS, substituted for direct government action and also replaced market functions in many areas. They introduced fundamental changes into the institutional structure of Yugoslav society and specifically into economic decision making, from the drawing up of five-year plans to current economic transactions between two or more enterprises. The Law on Associated Labor (Lat), adopted in 1976, implemented the 1974 Constitution’s concept of ‘“‘government by agreement”’ in and among business enterprises. Popularly called the ‘‘little constitution”’ or “miniconstitution,”’ it defined relationships within the framework of an enterprise and between various enterprises. It allowed any group of workers whose work results could be measured independently from those of other workers in the enterprise to establish a “‘Basic’”’ Organiza- tion of Associated Labor (BoAL). Each Boat had its own workers’ council, and relationships between various BOALS were regulated by voluntary self-management agreements concluded among them. Thus the very operation of the enterprise depended on agreement among the workers’ councils of the various BOALs. Under the law each Boat possessed its own assets, earned its own income, and decided on the distribution of income as far as that BOAL was concerned. Self-management agreements among BOALs within an enterprise ad- dressed such issues as distribution of income, investment activities, and working conditions. These could include, for example, the opening of a workers’ restaurant, day nurseries for children whose parents worked in the factory, or company resorts for workers at the sea or in the mountains. All decisions taken at the level of the enterprise that referred to personal 94 Yugoslav-American Economic Relations incomes, to enterprise investments, or to working conditions had to be ratified by the workers’ council of the enterprise as a whole. Self-man- agement agreements between or among separate enterprises were used, among other things, to pool their resources, by-passing banks (so-called alienated centers of power), and enabling the enterprises to lend to each other or to invest in projects directly. Unfortunately this method for determining investment priorities, while appealing at first glance, often led to misallocation of resources and to wasteful duplication of projects, creating production capacities beyond the needs of either internal or external markets. Within enterprises also, the constitution of 1974 and the Lat made efficient operation difficult. According to one new provision, a worker could not lose his job except for criminal misconduct, and if a job was eliminated for economic reasons, another one had to be found for him. This humanitarian provision virtually ruled out rapid technological or organizational changes to promote efficiency. In addition, the require- ment that the various BOALs’ workers’ councils agree on major decisions made it cumbersome and difficult to take timely action. With respect to investment decisions, workers had a short-term interest in reducing reinvestment of the company’s own resources in order to leave more for their own individual incomes and benefits. This was true even when such short-sighted actions threatened to weaken the enterprise, as long as prevailing practices shielded the enterprises from bankruptcy and the workers from unemployment. Since the LAL did not address the question of workers’ benefits in case of retirement or change of workplace, the workers had little incentive to channel the income of the enterprise into savings or investment but rather preferred to distribute it immediately. Thus self-financed investment was reduced, and the need for outside credit, domestic or foreign, was increased. The granting of increased economic power to local political authori- ties and the creation of quasi-independent BoALs within business enter- prises combined to weaken drastically the position of professional man- agers, who had made some gains in the early 1970s. This in turn opened the way for more arbitrary economic decision making at the local level. All of these factors tended to promote the ‘‘territorialization” of capital and the predominance of horizontal (territorial) integration of enterprises over vertical (production process) integration. When weaker enterprises faced difficulty, the city or county authorities would typically press to merge them with stronger businesses within their jurisdictions in order to keep the weak enterprises afloat. These forced mergers naturally weak- Yugoslav Growth and Economic Relations 95 ened the stronger enterprises, which could not invest resources that were mortgaged to cover the debts of the weak. If such mergers had been justified by purely economic considerations, political interference would presumably not have been necessary to bring them about. Decentralized Foreign Trade and the Small U.S. Share — The extreme decentralization of Yugoslav economic life in the latter 1970s also extended to foreign exchange. Not surprisingly in a country with balance-of-payments problems and a nonconvertible cur- rency, the regulations governing foreign trade and foreign exchange had to be adjusted periodically to compensate for deficiencies and rigidities. Unfortunately, in the absence of a convertible dinar, the changes in these regulations were as likely to be motivated by competition for scarce foreign exchange as by considerations of economic efficiency. Each of these successive regimes constituted a kind of compromise among the existing interests of particular branches and sectors of the economy, among the six republics and two autonomous provinces, between short- term and long-term interests, and between adherents of policies aimed at opening the economy to external markets and those who favored more closed markets in order to protect their domestic monopolies. Thus the foreign trade and foreign exchange regimes changed with the shifting balance of power among these competing interests and with the specific difficulties confronted by the Yugoslav economy. After political and economic decision making were decentralized by the Constitution of 1974, these regimes were changed again in 1977 to place foreign exchange earned abroad in the hands of the final exporter.35 This new regime disadvantaged enterprises producing raw materials and intermediate goods as well as firms supplying only the internal market. These businesses and other institutions that used foreign equipment or inputs but earned no foreign currency of their own (e.g., scientific research institutions, hospitals, schools, universities) were often forced to purchase hard currency from final exporters at prices far beyond the official exchange rate. An extreme example of the decentralization of foreign economic relations was the introduction in 1977 of a law requiring that separate records be kept of the ‘‘balance of payments positions” of each of Yugoslavia’s constituent republics and autonomous provinces.3¢ The aim of this measure was to require these entities to assume their share of responsibility for Yugoslavia’s external balance of payments. In practice, 96 Yugoslav-American Economic Relations however, it greatly reduced cooperation between constituents parts of Yugoslavia in the area of foreign trade and led to their dealing almost independently with foreign trade partners. The Yugoslav domestic mar- ket, already modest in size with 22 million inhabitants and an annual per capita income of $1,960,37 was thus virtually divided into eight parts for trading purposes. On the basis of their separate foreign exchange earn- ings, these entities, frequently represented by regionally oriented trading companies, imported goods primarily needed by the enterprises located on their territory. Any foreign currency they did not spend on purchases abroad was sold through self-management agreements to other republics, provinces, or enterprises at negotiated prices, often under the one-sided conditions described above. Under these circumstances the domestic shortage of foreign currency became even more acute. In an extreme example of this ‘“‘independence,” republics and provinces were even entitled to borrow from abroad on the basis of the estimated prospective inflow of foreign currency remitted from their workers abroad. All of these circumstances contributed substantially to the rapid rise in Yugo- slavia’s foreign indebtedness, whose overall shape and American compo- nent will be discussed in detail in Chapter 6. Foreign Trade: Growth and Structural Problems Yugoslavia’s foreign trade often reflected the institutional changes in Yugoslavia’s economy during the decades after 1950; indeed many of these general reforms were carried out for the specific purpose of promot- ing foreign trade. With this background in mind, we can examine briefly Yugoslavia’s foreign trade and in particular its trade with the United States. As in other countries foreign trade grew more rapidly than national product. From 1955 to 1984 the physical volume of Yugoslavia’s exports rose 7.4 times, imports 6.1 times, and the social product 5.4 times. Foreign trade grew rapidly in the decade 1955-65, when the European economy was booming. Growth in production and in foreign trade slowed down during the 1965—75 period with the maturing of the Yugoslav economy and with economic difficulties in Yugoslavia, Europe, and elsewhere. Some categories of imports declined early in the 1974-84 decade as certain import-substituting industries were developed; after 1980 imports generally tightened as a result of the country’s balance of payments difficulties. After a slow start during the first postwar decade, both Yugoslavia’s Yugoslav Growth and Economic Relations 97 imports and exports grew significantly as a share of national product. Exports increased from 5 percent of Gross Social Product in 1955 to 20 percent by 1984, while imports rose from 6 to 24 percent in the same period.38 The more rapid growth of imports was typical of countries experiencing rapid economic development as the industrialization pro- cess raised import requirements faster than it boosted the ability to export. Traditional exports of food and raw materials declined while exports of manufactures lagged behind industry’s needs for foreign equipment and materials, creating a so-called development deficit. Yugoslavia’s trade account with Western developed countries has been almost constantly in deficit since World War II; trade and current account deficits reached record levels in 1979. Although the trade deficit was drastically reduced and current account surpluses created in the 1980s, as seen in Table 4.3, this was less the result of positive adjustment by the Yugoslav economy than of administrative measures to restrict imports and “‘force”’ exports, even at unfavorable prices. As a result of past development policies and changes in industrial structure, manufactured products made up about 95 percent of Yugo- slavia’s exports by 1985. Unfortunately these developments did not produce a concentrated group of products for which Yugoslavia could become a major world supplier; its list of exports was long and varied. Light industrial goods including textiles, leather, footwear, and furniture became leading exports, with electrical machinery and installations, general machinery, transportation equipment, vehicles, other metal products, and chemicals growing in importance. Imports featured manu- factured products in similar categories but generally more sophisticated than those produced by Yugoslav industry—products of the machine- building industry, electric equipment and installations, chemicals, trans- portation equipment, iron, and steel. Oil and gas were the biggest import items, particularly during the periods of high petroluem prices after the first and second oil shocks, when they accounted for nearly one-third of all of Yugoslavia’s payments abroad.3° Table 4.4 shows the structural change in the composition of Yugoslav imports and exports between 1950 and 1984. About three-fourths of Yugoslavia’s trade has remained with the European countries, both East and West. This is traditional, reflecting geographic closeness and a certain complementarity of economic struc- tures. The lower level of trade with non-European countries persists despite Yugoslavia’s political commitment to increasing its economic cooperation with the developing countries of Asia, Africa, and Latin 98 Yugoslav-American Economic Relations Table 4.3. Yugoslavia’s Foreign Trade and Cur- rent Account Balances 1960—1987 (in millions of U.S. dollars) Current Total Total Trade Account Year Exports Imports Balance Balance 1960 576 VIA — 199 ee Gilal’s) 1961 583 852 — 269 —" 1166 1962 701 825 ela 48 1963 802 990 = atti) = 80 1964 895 1,218 — GB VA5) es 1965 1,092 1,182 = 90 = 67 1966 1223 1,445 ae = 46 1967 252 1,556 a eee = 96 1968 1,264 1,649 Stele = 120 1969 1,474 1,958 — 484 = 84 1970 1,679 2,637 — 958 ee) 1971 1,821 2,993 allyl — aed 1972 2,238 2,965 LETS 431 1973 2,853 4,137 eee 502 1974 3,805 6,922 lulz = 95 1975 4,073 7,058 — 2,984 =) 1625) 1976 4,897 6,762 — 1,864 180 1977 5,193 8,981 — 3,788 — 1,346 1978 5,811 9,576 — 3.7100) — 1,284 1979 6,802 12,871 — 6,069 — 3,665 1980 9,077 13,967 — 4,889 =Z, ole 1981 10,363 13,528 — 35165 — 958 1982 10,460 12,484 — 2,023 = 475 1983 9,913 11,144 sean PARE) 1984 10,136 10,925 = 7ffo\8) 478 1985 10,622 11,210 = 586 833 1986 11,084 11,786 = FAO We 1,100 1987 11,426 ps2 83 1,249 Source: International Monetary Fund, International Financial Statistics (Washington, D.C., 1988), p. 166. America.*° For long-term economic, political and security reasons, Yugo- slavia has sought to diversify its trade so that approximately half would be with Western developed countries, a third with socialist countries, and the remainder (just under 20 percent) with developing countries. Yugoslav Growth and Economic Relations 99 Table 4.4. Structure of Merchandise Exports and Imports According to Degree of Transformation, 1950 and 1984 (in percentages) Exports Imports 1950 1984 1950 1984 Unmanufactured 43 6 31 35 products Products of an 50 23 25 20 average degree of transformation Products of a 7 71 44 45 high degree of transformation TOTAL 100 100 100 100 Source: Federal Institute for Statistics, Yugoslavia 1945-1985, (Belgrade, 1986), p. 156. This geographic distribution proved difficult to achieve in practice, however, as can be seen in Table 4.5. The recession in Western Europe after the two oil shocks reduced demand in these countries, making it harder to sell Yugoslav goods there. On the other hand, clearing (quasi- barter) arrangements facilitated sales to socialist countries. In the absence of a convertible dinar, these sales were made artificially attractive to Yugoslav producers by a foreign exchange regime that enhanced the dinar value of clearing credits with socialist countries. During the late 1970s and early 1980s, therefore, these countries’ share of Yugoslav exports increased substantially. At the same time the developing countries that were not oil exporters needed credit in order to import Yugoslav prod- ucts, and Yugoslavia’s ability to offer export credits was limited.*1 During the 1970s and 1980s the USSR, the Federal Republic of Germany, and Italy alternated as Yugoslavia’s leading trading partner, with the three countries together accounting for 35 to 45 percent of Yugoslavia’s total trade. Iraq came next, in years when Yugoslavia made large purchases of Iraqi oil, followed by the United States. Yugoslavia’s terms of trade rose from 1955 to 1970 and then deteriorated after 1975, as shown in Table 4.6. Like other developing countries, Yugoslavia ex- ported some of its goods at a discount, hoping to compensate with volume for losses on the price side. 100 Yugoslav-American Economic Relations Table 4.5. Directions of Yugoslav Trade, 1972-1987 (percent of total) Exports to Imports from Western Western Industrial Developing Socialist Industrial Developing Socialist Year Countries Countries Countries Countries Countries Countries 1972 54.3 SLY 26.0 64.1 17.7 18.2 1973 52.9 23.9 23.6 61.1 21.2 77 1974 44.8 26.0 2952 59.2 22.8 18.0 1975 34.1 28.0 37.8 59.6 21.4 19.0 1976 39.6 26.5 34.0 54.0 22.9 23.2 STZ, aio) 30.8 Sil7 55.9 22.3 21.8 1978 35.1 30.5 34.4 55.6 22.8 21.6 1979 38.1 29.4 32.5 56.4 2169 21.7 1980 34.5 272 38.2 51.9 22.8 25.3 1981 30.8 Zoe, 43.4 52.1 20.5 27.4 1982 26.7 28.6 44.8 49.3 20.9 29.8 1983 31.9 28.9 39.2 44.8 24.5 30.6 1984 34.5 apf 38.4 43.3 30.4 26.3 1985 3257, 25.2 42.1 44.9 29.6 25.5 1986 34.4 29.7 40.0 47.2 27.1 25.7 1987 47.2 21.0 31.8 56.3 21.4 22:3 Source: International Monetary Fund, International Financial Statistics: Directions of Trade (Washington, D.C., 1988). Table 4.6. Yugoslav Export and Import Price Indices, 1955-1984 (1952 = 100) 1955 1960 1965 1970 1975 1980 1984 Export prices 89 93 alate} 134 249 437 473 Import prices 97 97 114 131 264 462 537 Terms of trade 92 96 99 100 94 95 88 Source: Federal Institute for Statistics, Yugoslavia 1945-1985, (Belgrade, 1986), p. 158. Invisibles Ease the Current Account Deficit Fortunately Yugoslavia’s income from so-called invisible exports to a number of foreign countries has offset a large part of its trade deficit. The Yugoslav Growth and Economic Relations 101 sources of this income have changed greatly over the years as its amount has increased. In 1955 grants from public sources (including aid from the United States) accounted for two-thirds of Yugoslavia’s modest $212 million of invisibles receipts. By 1984 invisibles had soared to $7.2 billion,42 mainly from services—tourism, transport and communica- tions, and construction projects abroad—and from unilateral transfers (remittances from workers employed abroad, pensions, and gifts to the public sector). The services sector was neglected while Yugoslavia was largely a closed economy through the early 1950s, for security reasons as well as the aforementioned economic policy of autarky. Foreigners were not encouraged to visit Yugoslavia, and Yugoslav citizens were discouraged from going abroad. The large-scale employment of Yugoslav workers and specialists abroad did not begin until after the 1950s, when Western Europe was still recovering from the war and did not need foreign workers. After 1970, however, all categories of invisibles increased, including remittances from Yugoslav workers abroad. These workers saved sizable shares of their earnings, placing them in host country or Yugoslav banks, or remitting them to family members in Yugoslavia. Yugoslavia’s net earnings from invisibles rose through 1980 and then fell as the number of Yugoslav workers abroad declined. A tightening of bank restrictions on private foreign exchange accounts in 1982 was also accompanied by a decline in deposits, as many workers abroad trans- ferred their deposits to foreign banks or even hoarded their foreign exchange savings at home, despite the loss of interest that this practice entailed.43 Tourism became a major source of foreign exchange earnings during the 1970s and continued to grow in the 1980s, with the 1983 Sarajevo Winter Olympics underscoring Yugoslavia’s efforts to earn tourist income on a year-round basis. A marked increase in tourism from the United States and the negotiation of several successive civil aviation agreements between the United States and Yugoslavia beginning in 1963 contributed to substantial invisibles earnings from the United States. Yugoslavia’s ‘invisible imports” have also increased, but not as dramatically. The opening up of the Yugoslav economy and the accom- panying political liberalization led to a greater number of Yugoslav citizens traveling abroad. Foreign business, cultural, and scientific rela- tions increased, and Yugoslav students went to study abroad, all increas- ing the outflow of foreign currency. After 1970, however, the most important foreign currency outflows were interest paid on foreign loans and credits and on foreign currency deposited by Yugoslav citizens in 102 Yugoslav-American Economic Relations Table 4.7. Yugoslavia’s Invisibles Account for Selected Years (in millions of U.S. dollars) Year Inflow Outflow Balance 1955 212 43 169 1965 482 74a) 269 1975 4,000 (approx.) 1,427 2,573 (approx.) 1984 7,200 4,884 2,316 Source: Federal Statistical Office, Yugoslavia 1945-1985, (Bel- grade, 1986), p. 160. domestic banks.44 As Table 4.7 shows, however, Yugoslavia’s net foreign currency earnings from invisibles have remained substantial. Trade with the United States since 1965 Trade between Yugoslavia and the United States was carried on at a relatively modest level in all the decades following World War II except the 1950s, as shown in Tables 2.2 and 4.8, reflecting the previous trading patterns of both countries and the distance that separated them. Yugoslav exporters were slow in “discovering America” during the 1960s and 1970s. Traditional economic ties with German and Italian markets re- mained strong, the USSR became a significant market after the 1950s, and the domestic Yugoslav market was flourishing. It was consequently easier for Yugoslav producers to sell in the home market, to traditional German and Italian partners or to centrally planned economies, than it was to venture into the unfamiliar and highly competitive U.S. market. Yugo- slavia’s trade account with the United States remained in deficit most years. In the 1960s, 1970s, and 1980s, exports to the United States averaged just under 6 percent of total Yugoslav exports. As can be seen from Table 4.8, sales to the United States doubled from 1962 to 1971, quadrupled from 1970 to 1980, and doubled again from 1978 to 1988. Leading exports during the earlier years included food, furniture, and other less sophisti- cated manufactured products, and in some years Yugoslavia supplied one-fourth or more of U.S. imports of hemp, hops, sour cherries, and wooden chairs. In the 1980s cars, metal products, and electrical equip- Yugoslav Growth and Economic Relations 103 Table 4.8. Trade between Yugoslavia and the United States, 1962-1988 (in millions of U.S. dollars) As Per- As Per- centage Yugoslav centage Yugoslav of Total Imports of Total _ Exports as Exports Yugoslav from Yugoslav Percentage Year to U.S. Exports U.S. Imports Balance of Imports 1962 52 es 183 20.3 = 113i 28 1963 46 5.8 186 17.6 — 140 25 1964 51 Be. 173 Asie! =A 29 1965 62 5.7 190 14.8 11745} 33 1966 7A3) 6.1 200 APA) SAS 3720 1967 79 6.3 124 Ths) =, aiG) 64 1968 89 7a 90 5.0 = il 99 1969 93 6.3 92.5 4.3 ar (O)5) 100.5 1970 89.5 5ed 160 5G = | 7/05 56 1971 109 6.0 197 6.0 = (fs) 55 1972 150 6.7 198.5 6.1 — 48.5 76 1973 233 8.2 187 4.1 + 46 125 1974 316 8.3 354 4.7 =! Bhs) 89 1975 265 6.5 417 5.4 alia) 64 1976 353 VoD 370 sil = il7/ 95 1977 297 5.6 545 5) — 248 54 1978 SA 6.5 615 6.2 — 244 60 1979 373 DED 1,059 7.6 — 686 35 1980 393 4.4 1,015 6.7 = (a2 39 1981 385 3.8 966 6.6 = layehil 40 1982 311 eel 842 6.6 Sail 37 1983 346 395) 773 6.4 —427 45 1984 432 4.2 620 B34 — 188 70 1985 463 4.4 778 6.4 = (5515) 59 1986 565 5.3 673 to) 7/ — 108 84 1987 733 6.4 716 a/ ae ils) 102 1988 766 6.1 725 50 + 41 106 Source: Federal Office of Statistics, Statistical Yearbook of Yugoslavia for relevant years. ment joined the traditional items of minerals, footwear, furniture, and meat products as Yugoslavia’s chief exports to the United States. American exports to Yugoslavia dropped by one-half from 1962 to 1968; shipments from the United States fell from 20 percent to 5 percent of total Yugoslav imports in the same period, as PL 480, Title I, ship- 104 Yugoslav-American Economic Relations ments of U.S. agricultural products for dinars were phased out in the 1960s. Shipments of agricultural products (for dollars but with credit up to three years) resumed in subsequent years, dictated by Yugoslavia’s requirements, and U.S. exports rose, also boosted by such items as passenger aircraft and other machinery, electrical and electronics equip- ment, coal, chemicals, and electric power-generating equipment. In 1979 and 1980 sales of equipment for the Krsko nuclear power plant combined with aircraft and other sales to push U.S. exports to Yugoslavia over $1 billion (according to Yugoslav statistics), a record that was not equalled again during the 1980s. As noted above Yugoslavia has had a trade deficit with the United States most years. Exceptions were bilateral surpluses in 1969, 1973, 1987, and 1988. The first two surplus years reflected declines in the U.S. sales as much as Yugoslav export successes, but in 1987 and 1988 Yugoslavia’s trade surpluses represented strong Yugoslav exports, sparked by sales of the Yugo automobile. In this brief survey we have observed the relatively modest but significant trading relationship that grew up between Yugoslavia and the United States in the decades since World War II. The next chapter will suggest that private business relationships since the 1960s have built upon the largely government-to-government dealings of earlier years and made a larger contribution to the Yugoslav economy than the small size of U.S. exports and imports would suggest. Enter the Businessman: Commercial Relations from the 1960s mmm Before the mid-1960s, Yugoslav-American economic rela- tions were conducted mainly between the two governments. From the mid-sixties onward, however, commercial relations between indepen- dent business entities became increasingly the rule. These enterprises and banks became the principal actors while the governments assumed supporting roles. In the United States the Trade Expansion Act of 1962 had set the stage for the Kennedy Round of multilateral trade negotiations, and MFN treatment for goods from Yugoslavia had been successfully reaffirmed. The U.S. government continued to treat trade with Yugoslavia like trade with the West for export control purposes, and the U.S. Department of Commerce included Yugoslavia with Western markets in its export promotion campaigns. When President Tito visited Washington in the fall of 1963, both he and President Kennedy agreed that no further American aid programs seemed necessary. Normal commercial relations appeared ready to move forward. American manufacturers that had supplied equipment for U.S. aid programs pursued follow-on sales sup- ported by export credits, granted or guaranteed by the Eximbank of the United States. Suppliers of agricultural commodities sold in Yugoslavia for dinars under PL 480, Title I, moved increasingly into sales for dollars under Title IV and successor programs. The government of Yugoslavia had taken steps to gain full membership in the Gatr, enacting a perma- nent customs tariff at a substantially reduced level and a partially liber- alized foreign exchange and trade licensing regime. The economic reform of 1965 increased the independence of Yugoslav business enterprises, and the joint venture legislation of 1967 opened the door to some foreign 106 Yugoslav-American Economic Relations private capital investment. Originally chartered by the government to carry out its objectives for the nation’s economic development, the business enterprises were now exhorted to act in their own self-interest, while efforts were made to strengthen the forces of the marketplace. Under these new circumstances, a good deal of innovation and flexibility was required on both sides. To the American businessman the Yugoslav economy seemed neither fish nor fowl. Yugoslav businesses were obviously not private, yet they were not state-owned either, and there was no government ‘‘czar’’ who could dictate investment or pro- curement decisions. The Yugoslav enterprises themselves were not al- ways sure of their position. Although the enterprises were nominally free from government direction, official pressures still influenced their activ- ities in a number of ways, including federal controls over banking, investment, and credit policies, government participation (until 1969) in the appointment of enterprise managers, and persuasion exerted through informal party channels. Yugoslavia’s need to import materials and equipment to further its economic development, together with its chronic shortage of hard cur- rency to finance these purchases, made a variety of innovative transac- tions necessary in order for trade to proceed. Triangular trade, barter, countertrade, and creative use of the dinar proceeds of PL 480 sales were used to make possible the sale of needed goods to Yugoslavia or to enhance the export competitiveness of Yugoslav exports. In addition to trade a variety of arrangements for joint and licensed production devel- oped over the years. American investors entered into a number of joint ventures founded under Yugoslavia’s foreign investment legislation as enacted in 1967 and subsequently amended. The absolute levels of U.S.— Yugoslav trade and investment, while substantial, have not been high. More important has been the role played by American goods and technol- ogy in Yugoslavia’s economic development and the challenge of the American market to Yugoslav exporters determined to carve out a posi- tion in the world marketplace. Trade, Not Aid: Official Initiatives — The Kennedy administration had explicitly opted for trade over possible additional aid to Yugoslavia when in 1962 it confirmed the policy of according most-favored-nation treatment to imports from that country.! By 1965 a confidential U.S. government assessment of the strategic implications of American trade policy vis-a-vis the Soviet Union and its East European allies stated unequivocally that, as far as U.S. Commercial Relations from the 1960s 107 government policy was concerned, “‘Yugoslavia stands apart from the other Communist countries of Eastern Europe.”’? A country report on Yugoslavia went on to note that ‘“‘ Yugoslavia has generally been treated as any other Free World country in the trade field, including the administra- tion of export controls, continued enjoyment of men tariff treatment, the use of the full range of trade promotion devices, access to EXIM Bank Credit guarantees, and U.S. support in international economic bodies (IMF, IBRD, GATT, and OEcpD).’’3 Thus the U.S. government, while stepping aside from a leading role in the economic relations between the two countries, remained commit- ted to strong support for normal trade and other commercial arrange- ments. Government as Salesman In the mid-1960s the U.S. Department of Commerce began a series of export promotion activities in Yugoslavia for export-oriented American businesses. The seventh annual U.S. exhibit at the Zagreb Trade Fair in September, 1964, featured American agricultural equipment and led to stepped-up sales activities by U.S. manufacturers such as John Deere, International Harvester, New Idea, and others. In the following month the first official U.S. government trade mission to Yugoslavia, led by an official of the Commerce Department and made up of private American businessmen, criss-crossed the country on behalf of the U.S. electronics, heavy equipment, and other industries. In May of 1966 the American Embassy opened an informational exhibit and business office at the Novi Sad Agricultural Fair and was admonished by President Tito, ‘‘Next year, come back with machines.’’ American manufacturers did return to Novi Sad in subsequent years, and in May of 1969 the U.S. Department of Commerce sponsored an American pavilion featuring equipment for the agricultural and food processing industries. Three years later the Com- merce Department sponsored a U.S. exhibit of food processing, refrigera- tion, and air conditioning equipment at the 1972 Zagreb Spring Fair.4 In 1967 the Commerce Department included Yugoslavia in a three- country promotion that included Spain and West Germany. Entitled “TOUREX 67,” it combined exhibits of equipment for the tourist industry with seminars given by the Cornell University School of Hotel Manage- ment. The Belgrade presentation featured, in addition, an international colloquium on tourism attended by representatives of most of the coun- tries bordering on Yugoslavia (Austria, Italy, Greece, Hungary, and Bul- garia) as well as Turkey, Poland, and the Soviet Union. The U.S. govern- 108 Yugoslav-American Economic Relations ment also lent its sponsorship to trade missions organized by industries or state or local governments. Several of these industry-organized, gov- ernment-approved (10GA) missions came to Yugoslavia, sometimes on itineraries that included the USSR and neighboring East European coun- tries.> Such missions were very much in vogue during 1966, 1967, and early 1968 but came to an abrupt halt with the Soviet crackdown in Czechoslovakia in June of 1968. During the mid-1960s some private groups in the United States launched boycotts against imported goods from Communist countries and targeted specific products from Yugosla- via such as tobacco and hops. The U.S. administration refused to be swayed by political pressure from these groups; officials spoke out publicly against such boycotts and cited Commerce Department trade promotion efforts as evidence of U.S. Government support for trade with Yugoslavia.® U.S. Trade Preferences for Yugoslavia Yugoslav efforts to sell in the United States received a boost when the generalized scheme of preferences (GsP) was enacted as part of the Trade Act of 1974. Developing countries, seeking to increase their export earnings in order to spur economic growth and development, had long been urging industrialized countries to give tariff preference to goods from the developing world. President Lyndon Johnson pledged that the United States would grant such preferences in his address to the United Nations Conference on Trade and Development (UNcTAD). During subse- quent years inter-agency discussions with the U.S. administration ad- dressed various issues concerning trade preferences. What countries should be eligible, and what products? How far should the tariff be reduced, and for how long? What considerations justified abrogation of the most-favored-nation principle, which was for so long central to the international trade regime? U.S. policymakers settled on a rationale for trade preferences similar to that advocated by Raul Prebisch, an early secretary general of UNCTAD, who argued that products from developing countries were analogous to so-called infant industries that received tariff protection in their home markets until they were able to compete with foreign goods. This meant that tariff preferences would apply to manufactured, or at least processed goods. Such goods would enter the U.S. market duty free until they demonstrated the ability to compete in that market without the prefer- ence. The competitive need for preferences was deemed no longer to exist Commercial Relations from the 1960s 109 for an item if one developing country supplied half or more of U.S. imports of that item, or if such imports exceeded the value of $50 million in the first year of preferences (the ‘‘trigger amount” was adjusted in subsequent years according to the growth of the U.S. market). The original preference scheme was enacted for a period of ten years; in 1985 it was renewed through the year 1993. Domestic producers insisted that items to be considered for preferential import treatment be reviewed annually for possible injury to domestic producers, and this provision was included. United Nations criteria were taken as the standard to define which countries qualified for ‘‘developing’’ status. Of the 7,000-odd items subject to U.S. import tariffs some 2,800, or about 40 percent, received preferential treatment under csp. Yugoslavia was among the top ten countries benefiting from U.S. gen- eralized preferences during the first decade they were in effect, as measured by value of goods entering the country under csp. Approx- imately half of Yugoslavia’s exports to the United States through 1986 received preferences. In 1980 the figure was 40 percent and in 1985 it was 59 percent. Yugoslavia’s share of preferred U.S. imports declined, how- ever, as other countries increased their exports, falling from 5.9 percent in 1976 to 1.74 percent in 1983. Over half of the Yugoslav items receiving preferential treatment under U.S. csp were concentrated in a relatively small number of products: aluminum products, insulated electrical con- ductors, pneumatic tires, and mechanical cutting tools. In 1981 an Ameri- can manufacturer petitioned to have wooden chairs from Yugoslavia removed from csp eligibility. The petition was denied then and for several years subsequently, but it was granted in 1986, and these items lost their preferential treatment on July 1 of that year.” Yugoslavia petitioned to add several items to the csp list, including canned hams, pig and hog leather, wines, fasteners, and ferro-silicon products, but these petitions were rejected because of the claimed import sensitivity of the domestic indus- tries producing these items. The longer-term effectiveness of tariff prefer- ences in enhancing the beneficial effects of trade can be debated; in any event, their impact declined as most-favored-nation tariffs, already at a low average level, were reduced each year pursuant to multilateral trade negotiations. Government-Sponsored Research A significant area of continuing Yugoslav-American economic relations has been the field of scientific and technical cooperation, where the 110 Yugoslav-American Economic Relations potential contribution to economic growth and development extends far beyond the actual dollar amounts expended. As we have already noted, American technical assistance to Yugoslavia from the early 1950s took the form of American experts and equipment made available to Yugoslav industry and agriculture as well as scholarships for Yugoslav technical and teaching personnel to study in the United States. In the 1960s dinar proceeds from the sale of U.S. agricultural surplus products began to be used to fund joint scientific research projects. More than 400 such projects were launched from 1963 to 1973. In 1973 this cooperation was institutionalized in an Intergovernmen- tal Agreement on Scientific and Technical Cooperation. The agreement, which was to last for five years, established a Joint Fund for Scientific and Technical Cooperation and a joint Yugoslav-U.S. board to administer the fund, which was supported by equal contributions from both sides. The original agreement was extended from 1978 to 1980, when another five-year agreement was signed. This agreement in turn was extended to 1988, and a new five-year agreement took effect in September, 1988. Research projects are initiated from the Yugoslav side and submitted through republic and provincial offices with scientific responsibilities to the Joint Board for evaluation and referral to one of some eleven partici- pating U.S. government agencies for cosponsorship. When the supply of U.S. government-owned dinars declined, support from the American side was funded from dollar appropriations in the federal budget, with dinar support from the Yugoslav side coming from the respective repub- lics and provinces. Some 175 projects were funded in the 1973—80 period and more than 700 from 1980 to 1988. During the 1980s total funding reached the value of $4 million per year. The joint fund has supported fundamental research in physics, chemistry, biology, and mathematics, as well as applied research in the diverse fields of agriculture, energy, construction (resistance to earthquakes), health, medicine and rehabilita- tion, environmental protection, mining, archeology, and anthropology.® Eximbank Underwrites Trade Economists have frequently disputed the effectiveness of government- sponsored efforts to promote exports by sponsoring trade missions, exhibits of export products, and the like. There is virtually no dispute, however, over the effectiveness of government-sponsored export financ- ing in expanding international trade and in competing with other would- be suppliers of world markets. The Export-Import Bank of the United Commercial Relations from the 1960s 111 States led the way in this field during the years immediately following World War II, enabling many war-weary and dollar-short countries to buy American goods and equipment on credit. The example of Eximbank has been successfully followed by almost every Western industrialized coun- try and has been emulated by many socialist and developing countries as well, Yugoslavia included. The U.S. Eximbank first became involved with vansiclewne at the request of the State Department in 1949 and 1950 with three loans total- ing $55 million for mining equipment, industrial raw materials (includ- ing cotton), and some foodstuffs. There followed a hiatus in Eximbank activities in Yugoslavia as both bilateral and multilateral aid packages predominated in the 1950s. Exim’s next involvement was a 1961 package of three direct loans to the government of Yugoslavia for industrial ma- chinery, equipment, and raw materials totaling $50 million.’ In the decade that began in 1964, some of Eximbank’s most significant credits to Yugoslavia involved follow-on sales by American private suppliers of equipment under earlier arp or 1ca credits. The diesel-electric “Kennedy locomotives” supplied by General Motors under piF in 1959-61 were so successful that the Yugoslav National Railway sought to order several more identical locomotives in 1964. This request was nearly derailed, however, because General Motors no longer produced that model of locomotive and in 1964 many of its production facilities were devoted to production of materiel for the Vietnam war. The Yugoslavs persisted, enlisting the U.S. government’s support, and General Motors produced more ‘‘Kennedies,”’ selling over $15 million worth to Yugoslavia over the ensuing seven years under Eximbank financing. Eventually a coproduc- tion arrangement was made between General Motors and the Yugoslav firm Djuro Djakovi¢é. Eximbank provided $15.25 million worth of financ- ing for the delivery of diesel-electric locomotive ‘‘sets” in 1978 and $17.2 million in 1982. Similarly, the $25 million fertilizer plant built at Pancevo under DLF loans was so successful, regularly producing at over 100 percent of rated capacity, that the Yugoslav producers opted to build a second identi- cal plant back-to-back with the first, where it could take advantage of the raw materials provided by Panéevo’s deposits of natural gas. The second plant, costing $35 million, was financed by Eximbank. Ona smaller scale the Sisak steel-pipe mill, originally built with Blaw-Knox equip- ment financed by an $8.5 million pF loan, gave rise to over $3.65 mil- lion in follow-on sales by Blaw-Knox under Eximbank financing in IQA 19 112 Yugoslav-American Economic Relations As can be seen from Table 5.1, Eximbank financing totaled slightly more than $2.5 billion over the forty years from 1949 through 1989. By March, 1990, Eximbank’s exposure in Yugoslavia totaled $1.3 billion, Eximbank’s third largest exposure worldwide.?! These are not insignifi- cant sums, but they by no means account for major shares of either country’s trade. The items financed, however, include equipment that Table 5.1. Eximbank’s Involvement in Yugoslavia Total Year Authorizations Products (Two small unused loans during the 1930s) 1949 $ 20,000,000 Nonferrous metals, mining equipment 1950 $ 35,000,000 Foodstuffs, cotton, industrial raw materials 1961 $ 50,000,000 Machinery, equipment, raw materials 1962 $ 120,224 Power shovels, industrial drills, spare parts 1963 $ 453,500 Power shovels, boring machines 1964 $ 16,850,605 Aluminum rolling-mill equipment, power shovels, blast hole drill, dump trucks, compressor, gear-making equipment 1965 $ 3,417,743 Oil-well drilling equipment, corn-harvesting ma- chines, combines, tractors, T.V. studio equipment, glass container production line 1966 $ 53,000,000 Railroad locomotives, fertilizer plant, shovels, excava- tors, dump trucks, tractors, combines, beet harvestors, graders, blast drill, central data processor, agricultural implements, oil-well drilling equipment 1967 $ 2,991,800 Electronic printer, excavators, transistor production equipment, oil-well servicing equipment, aircraft, front-end loaders, crawler tractors 1968 $ 4,184,200 Aircraft, dump trucks, rotary blast drills, printing equipment, communications equipment, mining shovels, tractors, farm implements, construction equipment, pipe layers, corn-drying plant, dump truck, air conditioning units 1969 $ 19,700,000 Railroad locomotives, tractors, farm equipment, print- ing press, loaders (wheel and track), mining shovels and equipment, compressors, engines and hoist equip- ment, crane, construction equipment (Table 5.1. Continued) Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Total Authorizations $ 24,661,000 $ 80,700,000 $ 34,900,000 $115,500,000 $601,800,000 $115,100,000 $ 56,700,000 $ 57,800,000 $ 55,800,000 $209,300,000 $ 94,700,000 Commercial Relations from the 1960s 113 Products Aircraft, seismic instruments for oil, rotary hole drill, equipment for polystyrene plant, dump trucks, trac- tors, oil-field equipment Oil-field equipment, aircraft, petrochemical facilities, telecommunications equipment, produce containers, uranium mining study, study for copper mine, electric locomotives Aircraft, rolling-mill materials, electronics equipment, mining equipment, rod mill, battery plant expansion, computer equipment Telecommunications equipment, fiberboard plant, polyester plant, steel mill construction expansion and modernization, cold rolling mill, aircraft, oil produc- tion equipment Aircraft, coal-mining equipment, textile equipment, aluminum products, nuclear power plant and equip- ment, nickel-mining and processing equipment, earth- moving equipment, expansion of wire-producing facil- ities, road tractors, railroad communication equip- ment, copper mine modernization, aluminum plant expansion, mining, milling and refining equipment, thermal power plant Aircraft, cold rolling mill, petrochemical project, ex- pansion of cable factory, ethane plant Aircraft, locomotives, coke silica production furnace Expansion of steel works, fiberboard plant, aircraft, tractors and harrows Locomotive sets, aircraft Battery plant, fertilizer plant, compressor factory equipment, copper mining equipment, bulldozers, tractors, wheel loaders, trucks, steel mill equipment, T.V. studio equipment, battery plant equipment, poly- ester plant, aluminum extrusion plant, construction equipment, scrapers, aircraft Aircraft, microelectronics plant, hermetic compressor plant, tractors, bulldozers, pipe layer, coal mining equipment, automatic crane, mining drill parts, mea- suring instruments 114 Yugoslav-American Economic Relations (Table 5.1. Continued) Total Year Authorizations Products 1981 $ 58,100,000 Bulldozers, poultry slaughterhouse equipment, drill- ing and mining equipment 1982 $ 67,700,000 Aircraft, locomotives, trucks, loader, compactor, con- veyors, drilling rig 1983 $ 25,000,000 Aircraft, electronic equipment, broadcasting equip- ment, blast hole drill, computer and telephone equip- ment, off-road trucks, mining equipment 1984 $ 82,500,000 Expansion of coal mine, gas field development, rod steel mill, expansion of wire producing facilities, loco- motives, tractors, caterpillar equipment, wheel loader, aircraft, construction equipment, radio and T.V. equip- ment, dump trucks 1985 $102,500,000 Aircraft, blast furnace equipment, natural and manu- factured gas, geophysical vehicles, tractors, graders, pipe layers, haulers, oxygen and liquification facility, drilling rigs, generators 1986 $159,100,000 Aircraft, gas field development, tractors, graders, pipe layers, drills, trucks, underground mining equipment, excavators, wheel loader, construction equipment 1987 $145,695,000 Boiler instrumentation, measuring instruments, trac- tors, off-road haulers, dump trucks, generators, graders, construction equipment 1988 $ 48,052,000 Gas field equipment, tractors, trucks, haulers, pipe layers, loader, drilling rigs, radio and T.V. equipment 1989 $286,312,000 Aircraft, dump trucks, self-propelled rotary drills, track-type tractors, wheel loader, process systems for manufacturing rubber belts Source: Eximbank records. has been important for the building and rebuilding of Yugoslavia’s in- dustrial base after World War II. The diesel-electric locomotives mentioned above, first provided under arp and ca financing, later financed by Eximbank, and still later assembled and manufactured in Yugoslavia under license from General Motors, provided the basic traction for Yugoslavia’s postwar railway system. Drilling, mining and earth-moving equipment, and mining sur- Commercial Relations from the 1960s 115 veys financed by Eximbank facilitated the exploitation of Yugoslavia’s considerable mineral resources, including Europe’s largest copper de- posit at Bor and the Trepéa lead and zinc mines. American-built equip- ment has been involved in most of the massive construction projects throughout the country—roads, ports, housing, and industrial facilities of all kinds. The nitrogenous fertilizer complex at Pancevo and the Sisak steel-pipe mill mentioned above are examples of American input that were repeated throughout the Yugoslavian petrochemical and steel in- dustries. American equipment also played an important role in Yugoslav agriculture and in the electronics, telecommunications, electric power, air transport, and other vital industries. Yugoslav Enterprises and American Companies —The unique features of Yugoslavia’s economic system, coupled with its lack of a convertible currency and chronic balance-of-payments deficits, put a premium on resourcefulness in doing business. The need for such resourcefulness began in 1948 under the most stringent circum- ° stances possible, with the Soviet political pressure and economic em- bargo on Yugoslavia. We examined the role of official American emer- gency assistance in Chapter 2, and in Chapter 4 we noted the origin and growth of Yugoslav business enterprises. By the 1960s a number of these enterprises were ready to take the initiative in making connections with the United States, as were some American companies in dealing with Yugoslavia. Trading Out of Adversity: Genex When the first trading companies were chartered in the early 1950s, their primary task was to counteract the effects of the Soviet economic block- ade. Among the earliest of these, General Export, or ‘‘Genex,”’ of Bel- grade! has been the leading Yugoslav firm in trade with the United States. It was formed by a decree of the Republic of Serbia in 1952 with seventeen employees and a working capital of $50,000. These resources were deployed on a worldwide basis to seek out scarce goods neces- sary for Yugoslavia’s economic development. When the Soviet embargo ended with Stalin’s death in 1953, Genex’s traders, many of them highly qualified as a result of prewar economic training, were in position to develop a lucrative clearing and reexport business.13 With its traders deployed in the major markets of the world and in many developing 116 Yugoslav-American Economic Relations countries, especially in Latin America, Genex was able to grow rapidly during the 1950s. While many countries lacked convertible currency and world markets were relatively underdeveloped, it conducted its clearing trade under a license from the National Bank of Yugoslavia, and most major transactions required government approval. In the late 1950s and early 1960s, most Latin American countries phased out trading on clear- ing accounts, and Genex focused on classical export and import business for Yugoslavia and among foreign countries. Where allowed to form its own companies under foreign law, Genex did so; elsewhere it maintained representative offices. Its multinational trading network, able to execute complex multisided transactions, obtained scarce goods during the So- viet economic embargo, promoted Yugoslav trade with developing coun- tries in the absence of convertible currencies, and enhanced the prof- itability of traditional trade. Genex has long operated a trading company in the United States, Impex Overseas, headquartered in New York, which has from its origin in 1952 been a major importer of American products. It was the official importer for many early purchases of grain, locomotives, aircraft, and equipment for the petrochemical, electrical power, and other industries under first arp and then Eximbank financing. In the early 1960s it spearheaded the Yugoslav drive to increase exports to the United States, expanding Yugoslavia’s traditional exports of semifinished metal prod- ucts of aluminum, brass, and copper, as well as wooden furniture4 and some agricultural products, especially canned meats.15 According to its executives, Genex has been involved from the 1960s in 25 to 30 percent of all U.S.-Yugoslav trade.1& Barter and Bargains: Jugoexport Another leading Yugoslav trading company, Jugoexport, negotiated a series of highly innovative sales to U.S. forces in Europe in the 1960s and 1970s. These were based partly on the accumulated dinar proceeds from sales of American agricultural commodities under PL 480. Advised by West European business consultants who were familiar with the applica- ble U.S. laws and regulations, Jugoexport was able to sell such items as beef, wine, apparel, and sporting goods to U.S. forces quartermasters or Post Exchange Services while purchasing wheat, corn, tobacco, and cotton from the United States. During years when U.S. procurement regulations were aimed at curbing gold outflow associated with U.S. balance-of-payment deficits, American military quartermasters were able Commercial Relations from the 1960s 117 to buy some $130 million worth of Yugoslav products using dinar proceeds from PL 480 sales to Yugoslavia under the terms of these sales agreements. Typically the quartermaster would buy dinars from the U.S. Treasury at a discount and, using these dinars, would realize substantial savings on the purchase of a variety of goods from Jugoexport. Some items, such as furniture, were purchased at a fixed price in. dinars; for others, such as wines, mixed payments were made of 80 percent dinars and 20 percent dollars. Jugoexport also made substantial sales to American armed forces and other markets based on barter and dollar purchases of U.S. agricultural commodities. Title III of PL 480 allowed American government agencies to contract for specific commodities being stockpiled under U.S. agri- cultural price support programs. In a typical barter transaction, after a U.S. military quartermaster certified a need for given quantities of beef, Jugoexport bought corn from American stockpiles against an eighteen- month letter of credit denominated in dollars and guaranteed by the Yugoslav National Bank. The corn was fed to cattle in Yugoslavia, and within eighteen months the letter of credit was paid off by Jugoexport’s sales of beef to U.S. forces in Europe. Similarly, Jugoexport also bought American corn on credit for dollars and paid off the loan with the proceeds of hard currency sales of beef to other markets. As the operation grew the Yugoslavs were able to purchase American beef cattle for fattening, which the U.S. military buyers considered superior to beef from dual-purpose European cattle. U.S. Army veterinarians were assigned to Yugoslavia to inspect the feedlots and slaughterhouses. Thus the Ameri- can forces in Europe dined on U.S. inspected corn-fed beef at a discount, and the Yugoslavs developed a significant export industry.?7 In the next chapter we shall see how similar credits from the U.S. Commodity Credit Corporation (ccc) and the World Bank provided valuable export stimula- tion and balance-of-payments support during Yugoslavia’s foreign debt crisis in the early 1980s. Patient and Persistent Sellers: John Deere An understanding of Yugoslavia and a willingness to accommodate its special circumstances have been the key to successful trading arrange- ments by many foreign suppliers, including American companies. A good example of this was the John Deere Company’s first major sale of harvesting machines in Yugoslavia in 1965. After exhibiting equipment in a U.S. government-sponsored pavilion at the Zagreb Fall Fair in 1964, 118 Yugoslav-American Economic Relations John Deere entered a contract later that year to supply forty harvesting machines for $1.2 million. A guarantee was to be provided by the Yugoslav Agricultural Bank, one of the three national specialized banks whose guarantees were accepted by the U.S. Export-Import Bank. John Deere built the machines in its January manufacturing run. The Agri- cultural Bank passed word that its overdue guarantee would be provided “next month.” When February and March went by and the guarantee was still not forthcoming, John Deere headquarters at Moline, Illinois, which had relied on its salesman’s assurance that all would be well, set April 15 as the deadline for receipt of the guarantee; otherwise it would have to retool the machines and put them on the American market. As the deadline approached and the guarantee did not materialize, Dr. Theodore Hess of John Deere’s Heidelberg office flew to Belgrade from the Federal Republic of Germany for a critical last-minute negotiating session. On April 15 the top officials of the Agricultural Bank urged him to persuade his company to wait ‘‘just a few more days.” Hess replied that he had already done so repeatedly, and now the company needed something in writing from the bank. As negotiations intensified it became apparent that officials of the bank were out in the country obtaining commitments from Yugoslav agricultural enterprises to increase their exports in order to be able to pay for the machines, and the bank was reluctant to give its guarantee until these commitments had been obtained. Finally the im- passe was resolved when the bank gave Hess, as an individual, written assurance that its guarantee would be forthcoming within the week. John Deere, as urged by Hess, agreed to proceed on that basis. The guarantee was given, and the machines were shipped. Because of the late date, they were shipped fully assembled and made a dramatic arrival at the port of Rijeka as they rolled down the gangway under their own power. Countertrade Broadens Opportunities: McDonnell-Douglas and Inex From the earliest postwar years, Yugoslavia’s ability to sell its products abroad has limited its ability to pay for imported items essential for continuing development. Yugoslavia, like most developing countries, experienced a “double gap” in its balance of payments, as the imports of machinery and equipment rose while the exports of raw materials de- clined before growing exports of manufactured goods could take up the slack. To accelerate the increase of exports to pay off the credits under which machinery and equipment were imported, Yugoslavia, along with other developing countries, enlisted the aid of its suppliers in marketing Commercial Relations from the 1960s 119 its exports. Over the years a wide variety of arrangements appeared under the rubric of ‘‘countertrade”’ or “‘offset,’’ ranging from virtual barter to very general commitments to assist in marketing Yugoslav products worth some stated percentage of the value of the goods imported. Commercial airlines offered the prospect of quickly earning precious foreign exchange as the Yugoslav airline, Jugoslovenski Aerotransport (jaT), proved to be an international money-maker and prime customer for commercial jet aircraft. Competition among the manufacturers of these big-ticket items was very keen. By the late 1960s, as aT made ready to replace its fleet of aging Caravelles, Douglas and Boeing of the United States, Tupolev of the USSR, British Aviation of the UK, and Sudaviation of France were all vying for the business. Salesmen stressed not only price, service, quality, and economy of operation but also credit terms and, as it developed, assistance in earning the wherewithal to pay off the credits. yat’s technical people favored U.S. products, especially Douglas’s new DC-9, on the basis of quality, size, and economy of operation. Other manufacturers—Tupolev and Sudaviation—made at- tractive price and credit offers, and British Aviation offered its BAC-111 on a straight barter basis. After four years of hard bargaining, however, the Douglas Aircraft Company (later a division of McDonnell-Douglas Cor- poration) succeeded in selling seven of its DC-9 jetliners to the Yugo- slavs.18 The sale was backed by some $35 million in Eximbank loans and guarantees, but a key element of the transaction was Douglas’s acceptance of a 25 percent countertrade or offset commitment; that is, Douglas agreed to assist in the sale of nearly $9 million worth of Yugoslav products in the United States and other export markets when the Yugoslavs agreed to buy their DC-9s. In order to compete with the BAC-111 barter offer, Douglas’s manager for new market development, John Wallace, offered his com- pany’s assistance in placing Yugoslav goods on world markets. While Douglas did not undertake to buy anything itself, it did purchase $40,000 worth of Yugoslav canned hams for its company cafeterias as a demon- stration of goodwill. The side agreement to help place Yugoslav goods was not a part of the sales contract and did not even contain a penalty clause if the $9 million target was not reached. The continuing advan- tage Douglas offered over straight barter deals was its assistance in developing new markets for Yugoslav products. Working in partnership with the Yugoslav trading firm Interexport (Inex), Douglas helped to find markets for such widely different products as truck panels, aluminum coils, brass rods, marble, shop coats, coveralls, and cutting tools, in addition to the canned hams that became famous as the hallmark of 120 Yugoslav-American Economic Relations Douglas’s pioneering efforts in international countertrade. In subsequent years, as Douglas sold more planes in Yugoslavia, its countertrade com- mitment increased—from 25 percent in 1969 to 50 percent in 1979. The trading relationship between McDonnell-Douglas and Inex and various Yugoslav manufacturing firms grew in confidence as well as sales volume over the years. Prospective customers for Yugoslav exports began to beat a path to Douglas’s door shortly after the first countertrade deal was announced in early 1970. Shortly thereafter Douglas provided office facilities for Interexport at its Long Beach, California headquarters and assigned a man from its purchasing department to advise Inex. The McDonnell-Douglas name opened doors both in the American market and overseas (El Al Airlines, for example) which would have been unlikely to open for the Yugoslav exporters acting alone. According to Henry Orenstein, director of offset purchasing,19 three factors remained constant in the Douglas-Yugoslav countertrade arrangements: The Amer- ican firm never took a commission on Yugoslav sales made through the “Douglas connection”; McDonnell-Douglas’s commitment remained one of ‘“‘best efforts’’ (without penalty provisions) to facilitate Yugoslav ex- ports of an agreed and gradually increased percentage of the value of its aircraft sales; and each year it exceeded the agreed targets. In 1985 McDonnell-Douglas received a setback of sorts; its American rival, Boeing Aircraft Company, won the fierce competition to provide the next round of commercial airliners for sat. Boeing’s sale of nine 737-300 aircraft for delivery in 1985 and 1986, backed by substantial Eximbank credits, was also accompanied by a substantial countertrade commitment in conjunction with the Yugoslav trading firm Generalex- port. At that point some McDonnell-Douglas managers questioned the cost-effectiveness of continuing to provide facilities for the Yugoslav trading firm Inex on Douglas premises, but Orenstein and others per- suaded their firm to continue the arrangement for the sake of the long- term business relationship, which they expected to continue. This stance was vindicated in 1988 when McDonnell-Douglas won orders for several MD-80 aircraft for Yugoslav air carriers, once again accompanied by substantial countertrade side agreements. By 1989, with sales of over twenty aircraft worth some $270 million, McDonnell-Douglas had per- formed offset services valued at nearly $100 million. Yugoslav Trading Companies Take a Hand in Countertrade Various forms of countertrade became increasingly common in the 1970s and 1980s as developing countries, short of hard currency, nevertheless Commercial Relations from the 1960s 121 became significant customers for big-ticket items such as aircraft and other machinery. In such circumstances, according to Generalexport’s Andrea Dozet, the producers of the big items ‘‘have to help their cus- tomers pay with what they sell.’’ This description highlights the role of the trading companies in countertrade, whether straight barter, ‘‘offset trade” (linked transactions) or simply ‘‘parallel business” where exports make imports possible even though they are not formally linked. With their extensive networks, trading companies can identify potential as well as existing markets and can locate manufacturers with the latent capability to produce items in demand as well as those that are already turning them out. Yugoslavia, with several large and capable trading companies, is very active in the various forms of countertrade. One such firm, Jugoexport, as we have seen, was able to supply a variety of goods for the U.S. military forces in Europe. Another, Interexport, has been instrumental in export- ing goods to pay for many of the planes purchased from McDonnell Douglas. “If Interexport hadn’t existed,” said Douglas’s Orenstein, “‘it would have to have been invented.” Generalexport, which has been pushing Yugoslav exports to pay for needed imports since the time of the Soviet economic embargo, also played a key role in many countertrade transactions. As the importer of General Motors’ diesel-electric (‘‘Kennedy’’) locomotives, Genex in the early 1970s arranged for the export of Yugoslav goods that enabled General Motors to fulfill a 40 percent countertrade commitment on sales of $41 million—the largest offset arrangement with Yugoslavia to that date. Again it was Genex that was able to find and provide Yugoslav products to meet Boeing’s countertrade commitment in its sale of 737-300s in the mid-1980s. In addition, however, Genex lined up two Yugoslav manufacturers—Soko (of Mostar) and Prvo Petoletka—that were able to meet Boeing’s exacting standards and produce, under the supervision of Boeing engineers, instrument panels and other compo- nents for incorporation into Boeing aircraft. This upgrading of Yugo- slavia’s manufacturing capabilities, one form of the transfer of technology that so many developing countries crave, was a major factor in the Yugoslav decision to go with Boeing in the face of stiff competition from Europe’s Airbus as well as from McDonnell Douglas. Coke Makes Things Go Better On a smaller scale the Coca-Cola Company has engaged in diverse forms of countertrade since the 1970s, when it carried out a variety of goodwill 122 Yugoslav-American Economic Relations projects in countries where it sold or licensed the bottling of its products. In the late 1970s Coke adopted the strategy of developing its own brands to market the goods it obtained via countertrade or offset purchases. The largest of these was its line of Yugoslav wines. Coca-Cola’s licensee and bottler in Yugoslavia was the wine-producing firm Slovin. To market Slovin’s wines in the U.S., Coke supplied equipment to produce a wine that would retain its flavor better in transit, provided a high quality label, and named the wine Avia from the last four letters of “Yugoslavia.” Boosted by Coca-Cola’s powerful marketing network, Avia’s export sales amounted to several million dollars annually, much of which was used to pay for Coca-Cola imported into Yugoslavia.2° lf We Had aHammer .. . A key to successful countertrade deals that facilitate sales to cash-short countries has been finding products from such countries that can be sold on world markets. At the same time the developing countries offering these products want the offset purchaser to place goods for which they have not yet found a market. Which goods will be made available for inclusion in a deal, and at what prices, thus becomes the subject of hard bargaining, not unlike that between countries that trade on clearing account. Sizable transactions have bogged down on this issue. The chairman of Occidental Petroleum Co., Dr. Armand Hammer, an early pioneer in East-West business and innovative trade arrangements, ex- plored the possibility of a major barter deal with Yugoslavia while he was in Belgrade in 1983 for the opening of an exhibit from his collection of art masterworks. Negotiations began between representatives of Occidental Petroleum and some of its affiliates and the large Yugoslav firms INA (Industrija Nafte) Petroleum and Chemical and Generalexport (Genex) trading company. In February of 1984, during the visit to the United States of Yugo- slavia’s head of state Mika Spiljak, Dr. Hammer announced the initialing in California of a ten-year barter program that could encompass up to $500 million worth of goods each way annually.21 Occidental and its affiliates would supply crude oil, petroleum products, and hides and skins each year up to the value of Yugoslav goods to be specified before the signing of a final agreement. The Yugo automobile, then in develop- ment, was one of the products mentioned for inclusion. Negotiations continued through November of 1984 but then bogged down. By year’s end it appeared that agreement could not be reached. According to Commercial Relations from the 1960s 123 Yugoslav participants Occidental’s representatives wanted to include on the Yugoslav side a high proportion of minerals and other raw materials that were already being sold internationally and were unwilling to take some manufactured goods for which the Yugoslavs wanted to develop markets. Although never canceled, the deal was not implemented. Small Cars—Big Business? The Yugo Venture The Yugo automobile venture, although originally proposed as a part of the Occidental barter arrangement, was sufficiently independent that it went forward even when the larger transaction did not. Malcolm Bricklin, the founder and original chairman of Yugo America Inc. and its parent corporation, Global Motors, was convinced in the early 1980s that there was room in the American automobile market for a small “‘basic”’ auto at the low end of the price spectrum. Such a car, he reasoned, would appeal to many young first-time buyers and to families purchasing a second or third automobile, who would prefer it to buying a used car.22 The search for a foreign producer that could produce such an automobile led to the Crvena Zastava manufacturing company in Kragujevac, Serbia. Zastava, a long-time licensee and joint-venture partner of Fiat, had over the years become the proprietor of much Fiat-related technology and was produc- ing asmall front-wheel-drive vehicle in some ways similar to the Fiat-128 of former years. Bricklin and several associates analysed the Fiéa, as the Yugoslav product was called, and came up with a list of modifications that would be required to sell the car on the American market. They also surveyed the Zastava plant to determine what changes it would need in order to produce the quality and quantity of automobiles that the Ameri- can market would demand. Established dealers across the United States were engaged to sell the Yugo, and many of them were brought to Yugoslavia to observe the preparations being made to manufacture the car. Top Yugoslav government officials, including the ministers of fi- nance and foreign trade, declared the government’s ‘“‘all-out support”’ for the project.23 At $3,995 the Yugo was the lowest-priced new car on the American market. Nationwide advertising compared it to the Volks- wagen Beetle and the Ford Model A. The first shipment of Yugos arrived at U.S. dealers in August, 1985. From about 4,000 in 1985, sales rose to 30,000 cars in 1986 and 50,000 in 1987; in the same period dealerships increased from 50 in the northeastern United States to over 300 nation- wide. In 1987 Yugo America entered a joint venture agreement with its supplier, Crvena Zastava, to invest in the production of a convertible car. 124 Yugoslav-American Economic Relations But the Yugo was plagued with problems. Yugo America’s first inspectors in Kragujevac reported a higher than anticipated rejection rate at the assembly line, slowing production below expectations. In the United States the Yugo was severely criticized by consumers’ publications, and the costs of repairs under warranty exceeded early estimates. U.S. sales sagged in 1988, despite an aggressive rebate program, and in January 1989, Global Motors Inc., Yugo America’s parent corporation, filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. According to press reports, Global was taken over by Crvena Zastava, which intended to reorganize the firm and continue to sell its cars in the U.S.24 These plans were subsequently carried out. At this point, with the future still very much in doubt, the Yugo venture has nevertheless upgraded Yugoslavia’s automobile production capabilities substantially and added some hundreds of millions of dollars to the positive side of Yugoslavia’s international trade account. Wooing Foreign Investors and American Responses — As trading relationships developed between Yugoslav and Ameri- can firms over the years, many of them evolved from the relatively simple purchase and sale of goods into more complex arrangements, which the Yugoslavs call “higher forms of cooperation,” involving some transfer of technology in local construction, manufacture of components, coproduc- tion or joint managing or marketing responsibilities. Depending on the circumstances many firms on both sides found it advantageous to enter into joint ventures of a sort we have not yet examined, involving direct investment by American firms in business operations conducted in Yugoslavia. Although Yugoslavia in 1967 was the first socialist country to pro- vide a legal framework for foreign private capital investment in its economy, the first legislative steps were tentative and reflected the division of views that had characterized the debate prior to their enact- ment. Foreign investment was permitted, in the hope that it would bring with it industrial technology, managerial and marketing expertise, as well as financial capital, but the foreign investor was limited to a minority position and barred from equity ownership, reflecting the fears of some that a flood of foreign capital investment posed a threat to socialism and self-management. There was no flood. No deals were concluded in 1967 and only a handful in 1968.25 No doubt some investors were put off by the daunting task of spelling out contractual rights to take the place of tra- Commercial Relations from the 1960s 125 ditional equity ownership, others by uncertainty surrounding the re- patriation of their profits, and still others by the requirement that at least 20 percent of any profits realized by a foreign investor must be reinvested in Yugoslavia. A few early birds took the plunge, however, and one of the very first ventures, signed May 17, 1968, was between an American firm, Printing Developments International (ppi—a Time-Life subsidiary), and Be- ogradski Grafi¢ki Zavod for color printing. Some Italian and West German firms also signed early agreements. Still only five joint ventures were signed in 1968, twelve in 1969, and eleven in 1970. In late 1970 the laws were changed to encourage more foreign investment. The requirement to reinvest 20 percent of profits was dropped, and at the same time the retention quota—the amount of hard currency earnings a joint venture was allowed to retain for its own use (including repatriation of profits)— was increased from 7 to nearly 40 percent. In 1971 legislative and constitutional amendments were enacted providing that a foreign inves- tor’s rights under a joint venture contract could not be impaired by subsequent laws or regulations.2® In early 1972 the retention quota was increased so that 53 percent or more of a joint venture’s hard currency earnings could be used to repatriate profits. Gradually the number of foreign investors increased, most of them from Western Europe. In late 1971 a New York electronics firm called Knapic invested $600,000 in a joint venture with Iskra of Slovenia, and in 1972 Eaton Corporation put $2.2 million in a venture to produce automatic controls with the Bosnian firm Rudi Cajavec.27 Squaring the Circle: Yugoslav Joint Venture Legislation Yugoslavia’s joint venture legislation addressed the dilemma of how to permit capital investment in a socialist economy in the first instance by substituting contractual rights for property rights. Legal analysts pointed out that a carefully drafted contract could satisfy some investors’ needs for a degree of control over operations without the need for equity ownership that might violate Yugoslavia’s system of socialist self- management.2® Formulating the actual joint venture agreements to do this was still no mean task, however. Under Yugoslav law a joint venture, like any other enterprise, had a workers’ council as its “‘supreme manage- ment body.” The foreign investor was limited to a minority position on the business board, and the director, whether by law or established practice,?9 was invariably a Yugoslav. 126 Yugoslav-American Economic Relations One of the earliest joint venture agreements involving an American firm addressed these issues in ways that enabled the foreign investor to have a decisive policy voice in the venture and provided checks against departure from that policy. The agreement creating the Hemteks joint venture to produce polyester fiber in Skopje, Macedonia, provided for a director to be appointed by the workers’ council upon the nomination of the business board and pursuant to the law, but it also provided for a deputy director to be appointed by the American investor and stipulated that the director would make the decisions within his competence “‘in mutual agreement with the deputy director, or take the issue to the busi- ness board.” The joint venture agreement also gave the American investor substantial representation on the business board and required the board to take its decisions by a weighted majority that needed the assent of the American investor’s representatives. The agreement specified the objectives of the venture, spelling out in detail the capacity of the factory to be built and the specifications of the product to be produced. It stated in particular the aim of returning a profit to the partners in proportion to their investments, and these proportions were also stipulated. It reserved to the business board basic matters of financial and commercial policy, choices of technology, any substantial appropriations of funds, pricing and sales policy, and employment of foreign persons. In areas where the workers’ council was “‘sovereign,”’ it required the board to submit to the workers council draft production plans, financial plans and statements, and recommendations on staffing and wage scales (except for the director and his deputy). The workers’ council was then to decide these latter issues ‘‘after hearing the recom- mendations of the business board (but not inconsistent with the con- tract).’’ The agreement mandated the director and deputy director to “stop execution’’ of any decisions of the workers’ council that were contrary to the joint venture agreement, or to decisions properly made under its terms, that violated laws or regulations. If the workers’ council insisted on its action, it was to submit a written explanation to the business board, which would return a counterexplanation if it found the workers’ council’s decision unjustified. If agreement could not be reached between the business board and the workers’ council, the issue was to be referred to the chief executives of the founding partners, who had the right to cancel the joint venture agreement if they could not resolve the dispute. In any event these provisions were never invoked and the venture ran its full course. A strong incentive toward resolving dis- putes amicably was a provision in the agreement that substantially Commercial Relations from the 1960s 127 increased the amount of capital to be returned to the American partner if the venture was terminated prematurely by the Yugoslav side. Success without Profits The joint venture described above was regarded as highly successful. Its approaches to the issues that emerged when capitalist and socialist firms combined in a socialist legal setting were widely followed in other joint ventures. The venture was characterized by quick start-up time and high efficiency of operation, yet it was only marginally profitable, as profits were greatly cut back by the Yugoslav government’s price controls on its products. Still the venture was seen as a success from both sides. For the Americans it provided valuable access to the Yugoslav market for sales of the equipment and raw materials required for production. Their invest- ment and increments in its value were repatriated on time as agreed. For the Yugoslavs it provided the equipment and raw materials necessary to produce polyester fiber for their textile industry, plus sophisticated technology, business and shop know-how, and a commitment from the American side to establish and run the business as an efficient operation. Two aspects in particular of this early experience were echoed in many subsequent joint ventures. First, anticipated profits from the joint venture were not alone sufficient to make it attractive to the foreign investor. Profits were elusive; there needed to be other ‘‘sweeteners”’ such as sup- plying machinery and raw materials, access to a new market, or some other aspects of the transaction to make the project attractive to the foreigner. Second, the transfer of technology that was often most useful to the Yugoslav side was shop and business know-how, the sum of many seemingly small procedures that tightened up the business and made it run more efficiently, and therefore profitably, rather than specific patents or trade secret formulae that could be transferred on a one-time basis. International Support for Investment The unique prospect of private capital investment in a socialist economy attracted widespread international attention, and in December of 1969, a little more than two years after the passage of Yugoslavia’s original joint venture legislation, an international corporation was formed to promote foreign investment in Yugoslavia by arranging joint venture projects. This entity, the International Investment Corporation for Yugoslavia (11cy) was formed by the International Finance Corporation (iFc) of the World Bank, 128 Yugoslav-American Economic Relations which subscribed 14.8 percent of its capital, a group of forty-two foreign banks (59.3 percent), and twelve leading Yugoslav banks (25.9 percent). Among the American banks in the international group were the Chase Manhattan Overseas Banking Corporation, Girard International Bank, Marine Midland Overseas Corporation, and the Philadelphia Interna- tional Investment Corporation. The icy was incorporated under Lux- embourg law with its head office in London and began operations in 1970. Its first president was an eminent American, Anthony Solomon, who had served as assistant secretary of state for economic affairs under Presidents Kennedy and Johnson and would later serve as undersecretary of the treasury and president of the Federal Reserve Bank of New York. rcy’s president was always a foreign national, nominated by the foreign share- holders; the vice president was always a Yugoslav. The cy provided information on investment in Yugoslavia for its shareholder banks and their customers, but its role went beyond provid- ing information. Operating on a retainer-plus-success fee basis, mcy sought out potential joint venture partners and put them in touch with each other, acting as consultant, law firm, and merchant banker all in one, seeing the contract through to signature and official approval of the agreement. From time to time cy also invested its own resources in a project; by the late 1980s it had such a stake in fourteen joint ventures between Yugoslavia and foreign investors. The icy was involved directly or indirectly in many of the more successful joint ventures established in Yugoslavia, and several U.S. firms found its assistance valuable in cutting bureaucratic red tape and getting ventures off the ground. Over the years the icy was active in facilitating investments in extractive, industrial, tourist, and agricultural projects, all priority target areas for Yugoslav economic development. As experience grew in forming and operating joint ventures, their number grew. In the first 10 years after the joint venture legislation was passed in 1967, approximately 170 joint venture agreements were signed with foreign partners, predominantly from Western Europe, representing some $325 million worth of foreign investment in the Yugoslav econ- omy.3° American firms had concluded over 30 joint venture agreements with Yugoslav partners, of which some 25 were in force in 1977.31 Among the first American firms to conclude joint ventures in Yugoslavia, in addition to ppi (1968), Knapic (1971), and Eaton (1972) mentioned above, were Bell/irr (1972), Gillette (1972), International Flavors and Fragrances (1972), Armco Steel (1973), Black and Decker (1973), Carrier (1973), Chemtex Fibres (1973), and Dow Chemical (1973). Central to these Commercial Relations from the 1960s 129 ventures was the production of American products under license in Yugoslavia. The range of products was wide, including such diverse goods as steel, polyester fiber, razor blades, hand tools, air conditioners, and telephone exchanges. According to information available in 1988, most of these agreements were still in force some fifteen years after they were signed, and the majority of those no longer in force were concluded amicably under their original terms. One such example was Intersilver, the joint venture formed between the American firm Gillette and the Yugoslav firms Intercommerce and Mikron to produce razor blades. During its ten-year life as a joint venture, Intersilver reportedly did a highly profitable domestic and export business. Thereafter it became a Yugoslav company with continued successful operations and expanded facilities. Investment Insurance under OPIC In May of 1973, following the conclusion of a bilateral investment agreement between Yugoslavia and the United States, the U.S. Overseas Private Investment Corporation (opic) was authorized to insure U.S. private investments in Yugoslavia against certain risks. In 1971 opic began operations as a self-sustaining U.S. government agency to promote private investments in developing countries. It received no public funds beyond its original start-up appropriations, which were returned to the U.S. Treasury. Under the 1973 authority, U.S. investors in Yugoslavia were able to purchase insurance from opic against the risks of expropria- tions, war, revolution, or civil strife (inconvertibility insurance was not made available for Yugoslavia). By 1984 some $25 million worth of opic insurance was in effect covering U.S. investments in nine joint ventures in Yugoslavia. Foreign Investment Rules Change in 1978 The legislative criteria for foreign investment in Yugoslavia during the first decade (1967—77) were relatively few, and practice under the law was quite clear. The parties had broad leeway to define their relationship in a joint venture agreement, which was normally accepted for registra- tion if on its face it met the requirements of the law.32 New legislation passed on March 30, 1978, made the approval of a joint venture contract more complicated. In addition to the existing requirements, local authori- ties had to approve the venture, the Federal Planning Institute had to 130 Yugoslav-American Economic Relations certify that the venture fit into Yugoslavia’s economic strategy, and the Federal Chamber of Economy had to certify that investment goods (equip- ment) to be brought in by the foreign partner were not available in Yugoslavia. Final approval by a committee of the Federal Executive Council was then required. In broad terms the official approval of a joint venture agreement changed from a relative formality to a difficult and complex project. In addition the foreign partner’s proportionate share in profits was limited to no more than its share in investment, and the maximum profits that could be transferred abroad were limited to 50 percent of foreign exchange the venture earned by exporting. These changes had a generally chilling effect on new foreign investment in Yugoslavia. Although several new ventures with American partners were registered in the years 1979-84, most of these had been under negotiation before the 1978 law was passed, and the total number of joint ventures on the books with partners of all nationalities stagnated at about 180 in those years.?3 Most prospective investors held off, waiting for more favorable conditions. As we shall see these adverse changes in the investment rules, coupled with the increased availability of loan funds, created a bias toward loan rather than investment capital, which contributed to the acceleration of Yugoslavia’s foreign indebtedness in the latter 1970s. It can be seen in Table 5.2 that the food, agriculture, and chemical (including petrochemical and synthetic fiber) industries attracted the most American investments during the first decade of Yugoslavia’s joint venture legislation. The second decade saw a substantial number of ventures in the electrical and electronics industries, and U.S. firms’ interest in general manufacturing and oil prospecting ventures continued from the early 1970s. Good Chemistry, Bad Markets: Dow, DOKI, and DINA Some of the factors that made the Yugoslav chemical industry interesting to Western investors included government efforts to upgrade the indus- try, ashort product development cycle, and world marketability of chem- ical products.34 The Dow Chemical Company, which had been making significant sales in Yugoslavia for many years, invested in the 1970s in two important joint ventures, pox! and pina. The second of these, pina, was the largest foreign joint venture project in the country and a source of major disappointment when it was dissolved. Dow signed its first Yugoslav joint venture agreement with the Yugoslav chemical firm oxi of Zagreb to construct a polystyrene plant of Table 5.2. Date Signed U.S. Firm 1968 Printing Develop- 1971 1972 1972 1972 1972 1972 1972 1972 1973 1973 1973 1973 1973 1973 1973 1974 1974 1974 ments International (pp1), New York, (London)? Knapic Associates, New York Eaton Corp.,Cleve- land, Ohio Bell/irr Antwerp? Rohm & Haas, Milan@ International Flavors & Fragrances (IFF), Netherlands? Oculus, Chicago Gillette, Boston Engineers Interna- tional, Pennsylvania Engineers Interna- tional, Pennsylvania Chemtex Fibres, New York Chevron and Buttes Gas and Oil, Califor- nia Black and Decker, Maryland Armco Steel, Ohio General Electric, New York Production Machin- ery Corp., Ohio Waterbury Farrel, Delaware Dow Chemical, Mid- land, Michigan Carrier/Marlo Re- search, Italy/ Luxembourg? Corn Production Sys- tems, Rosemount, Minnesota Cottage Financial Es- tablishment, Lich- tenstein? Cottage Financial Es- tablishment, Lich- tenstein? Commercial Relations from the 1960s U.S.-Yugoslav Joint Ventures Yugoslav Firm Beogradski Grafiéki Zavod IskRA, Trbovlje Rudi Cajavec ISKRA, Kranj Jugokril, Ljubljana ETOL, Celje Ghetaldus, Zagreb Yugoslavia Com- merce, Belgrade; Mikron, Zemun Delnice upI, Sarajevo; Agrokombinat Rogatica outs, Skopje, and In- tex, Skopje Jugopetrol, Kotor Tehno Impex, Ljubl- jana Jesenice Steel oxi, Zagreb Union-Invest, Sara- jevo IPK Osijek Komgrap, Belgrade; Keramika, Mladenovac Opalska Breéa Kumanovo Product Color Printing Semiconductors Automatic Con- trols Telephone Ex- changes Polyacrylic Plas- tics Fragrances & Oils Contact Lenses Razor Blades Cellulose Malt Polyesters Offshore Oil Drill- ing Electric Hand Tools Steel Polyesters Air Conditioners Corn Products Ceramic Tiles Ceramic Tiles 131 Status (if known) Concluded 1975 Expired 1976 Producing Dissolved 1980 Dissolved 1980 Concluded 1988 Functioning Producing Revised 6/30/77 Dissolved 1977 Not in Force (Table 5.2. Continued) Date Signed 1974 1974 1974 1975 2/26/75 1975 1975 1975 1976 1977 1977 1978 1978 1980 1980 1980 1980 1980 1984 1985 1985 1985 1985 1986 1987 1987 1987 U.S. Firm Mira Lanza Interna- tional, Luxembourg? M&T Chemical Engi- neering, Greenwich, Connecticut Trade & Business Brokers, Frisenberg, Luxembourg? Waterbury Farrel (Textron), Delaware Engineers Interna- tional, Pennsylvania Engineering Interna- tional, Pennsylvania Engineering Interna- tional, Pennsylvania CPC Europe, Wilm- ington, Delaware Dow Chemical, Mid- land, Michigan Celotex, New York General Motors, New York Uniroyal Goodrich, Akron Honeywell-Bull, Min- neapolis Alpha-Solarco, Cin- cinnati General Foods, Battle Creek Baxter Travenal, Chi- cago GTE, Stamford Gould, Cleveland Phoenix Technology, Arizona Universal Leaf Combustion Engi- neering, Canada* Chevron Oil, San Francisco Texaco McDonald’s Owens Corning Fi- berglass Salen Linblad Cruis- ing, New York Yugo America Yugoslav Firm Soda-So, Tuzla Alkaloid Chemicals, Skopje Rudnik Nemetala, Valjevo Unis Metals, Sara- jevo Sumsko, Karlovac Savacel, Jasenovac Sarajevska Pivara, Sarajevo Livno Poljoprivredno Servo Mihalj, Zren- janin INA, Zagreb Morava, Svetozarevo LzT, Kikinda; ia, Kikinda Tigar, Pirot EI Nis; Progres, Bel- grade Elektromontaza Agrocoop, Novi Sad Zdravlje, Leskovac EI Nis 1PpK Vrba§; Petind, Vrbas Naranaplast Metkovié Virzinija, Virovitica Minel, Belgrade INA, Zagreb INA, Zagreb Genex Poliester, Pribo Atlas Ambassador Crvena Zastava 132 Yugoslav-American Economic Relations Product Detergents PVC Stabilizers Chemical Prod- ucts Cold-rolled Steel Bands Sulphate and Bleached Cellu- lose Beer and Beer Ferment Malt Corn Products Petrochemicals Wood Products Automotive Cast- ings Tires Computers Solar Energy Equipment Snack Foods Dialysis Supplies Telephone Switching Equip- ment Polymer Gradu- late Hard and Floppy Disks Tobacco Boilers Offshore Oil Drill- ing Offshore Oil Drill- ing Restaurants Polyester Pipes Cruise Ship Automobiles Status (if known) Not in Force Dissolved 1979 Disssolved 1976 Producing Dissolved 1984 Producing Producing New Agreements 1981/1982 Dissolved 1983 Producing Producing Producing Producing Producing Functioning Functioning Functioning Seeking Financ- ing In Formation Reorganized (Table 5.2. Continued) Date Signed 1987 1987 1987 1987 1988 1988 1989 1989 1989 1989 1989 1989 1989 1989 1989 U.S. Firm Lunkenheimer Ener- govalves Chronar Corp. H-R Microelectronics Combustion Engi- neering Pritchard/Black & Veatch Combustion Engi- neering JF Helmold Slots 4 US RTM Engineering Systems Nassau Ltd., Palo Alto Miles International Games Europa, New Jersey Petak Celova, Ar- lington L. W. Shimeg, Santa Clara Hyatt International Commercial Relations from the 1960s Yugoslav Firm Energoprojekt, Bel- grade Rade Konéar Split Iskra Delta Technol- ogy MINEL, Belgrade INA Naftaplin, Zagreb MINEL, Belgrade Zelezarna Jesenice Lutrija Hrvatske, Zagreb Kurent, Ptui; Progres, Belgrade Rudkop, Kavadarci NiSauto, Nis Ugostiteljska, Ohrid Pejovic, Novi Sad Boris Kidrié, Maribor Jugopetrol, Rad, Jug- oexport, Energopro- jekt, Putnik Product Valves Photovoltaic Cells Computer Board Power Station Controls Engineering Marketing and Fi- nancial Services Steel Casino Engineering Con- sulting Geological Re- search Trade and Leas- ing Casino Office systems Computer soft- ware Hotel 133 Status (if known) Producing in West Under Construc- tion Producing Functioning Functioning Starting Up In Formation Functioning Functioning Functioning Starting Up Starting Up Starting Up Under Construc- tion NoTE: Some caution must be used in dealing with information on joint investment ventures in Yugoslavia, since complete official data is not available. Early records of registered joint ventures were public, but this policy was changed in later years for reasons of commercial confidentiality. Information for this section has been obtained from the International Investment Corporation for Yugoslavia, the U.S.-Yugoslav Economic Council, the American Embassy in Belgrade, and others with access to extensive, albeit unofficial information about joint ventures. Because the participants have not always wished to publicize the launching or dissolution of their ventures, some inaccuracies have been unavoidable in describing them. We have, nevertheless, endeavored to present the best information available in the hope that the general picture that emerges therefrom will be helpful to the reader. *Foreign subsidiary of American firm. 35,000 tons capacity. The enterprise, named DOKI, was an initial success, exporting some 10,000 tons of product and substituting for about half of Yugoslavia’s previous imports of polystyrene with the remainder. The plant represented an overall investment worth about $25 million with a work force of ninety-five qualified technicians. In 1978—79 DOKI was 134 Yugoslav-American Economic Relations caught in a price squeeze when the world price of styrene, its principal (and imported) raw material, escalated 250 percent while its domestic product remained under price control. The firm reduced production to cut losses and in 1980 received some price relief. Dow’s other joint venture in Yugoslavia was a major undertaking with INA petroleum and chemicals of Zagreb to build a petrochemical complex on the Adriatic island of Krk near Rijeka. Signed in March of 1976, this project, called pina, was the largest foreign joint venture in Yugoslavia, with a total value (representing loans as well as equity) estimated in excess of $1 billion. Originally planned in three phases, the plant experienced some delay in the first phase of construction. A wide range of petrochemical production was planned: vinyl chloride monomer (VMC), ethylene, propylene ethyl benzene (EB), ethyl dichloride, (EDC), low density polyethylene (LDPE), styrene monomer (SM), and pyrolitic benzene (LHC). pina’s styrene production in particular was counted on to solve pok!’s problem with imported raw materials. In January of 1982, Dow asked for a moratorium on construction of pina’s second and third phases in order to concentrate on completing phase one. Dow subsequently availed itself of the cancellation provisions of the joint venture agreement. After lengthy and difficult negotiations between Dow and ina of each party’s claims and counterclaims for compensation, a “divorce” settlement was finally reached and the joint venture was ended. Phase one of the project remained in production under INA’s management, and Dow remained an important supplier of materials and customers for the plant’s product. While the cancellation of Yugoslavia’s largest foreign joint venture was a major disappointment, the cancellation was evidently triggered not by flaws in the venture itself but by generally unanticipated developments in the world petrochemical market. If there is a silver lining to the cloud of the cancellation, it may be that Dow as a major multinational chemical company was able to read the international market developments in time to prevent greater losses that could have been caused by proceeding with phases two and three of the pina project when the world market would not support the venture. One factor contributing to the relatively advanced state of Yugo- slavia’s chemical industry is its endowment with some hydrocarbon resources. Modest oil deposits have been found in the country as well as some substantial deposits of natural gas. ina of Zagreb was one of the first enterprises formed to develop these resources, and it grew to be a major importer and refiner of oil as well as the kingpin of Yugoslavia’s pe- trochemical industry. Several Yugoslav oil companies for years con- ducted oil explorations on Yugoslavia’s territory where geological forma- Commercial Relations from the 1960s 135 tions were judged favorable for the presence of such deposits. In the 1960s Jugopetrol of Kotor in Montenegro joined with Texaco to conduct off- shore explorations in Montenegrin waters, but these efforts were aban- doned. Then in 1973 Jugopetrol joined in a joint venture with Chevron and Buttes Gas and Oil Corp. of California to renew these explorations. INA, which had independently conducted both onshore and offshore exploratory drilling for many years, also joined forces with Italian and American companies in its Adriatic operations. In 1986 1Na of Zagreb signed a joint venture for offshore oil exploration with Chevron. In March of 1988 1na-Naftaplin of Busenje also signed a joint venture agreement for offshore drilling, this one with Texaco. In Yugoslavia the joint venture format offers some advantages over the more traditional granting of concessions or ‘‘mineral rights’; by including a domestic partner in a joint enterprise that is sanctioned by Yugoslav law, it avoids the politi- cally sensitive issue of the country’s natural resources being exploited by a foreign corporation. It also provides a basis for special customs treat- ment of drilling equipment provided by the foreign partner, either as part of its investment or on lease to the joint venture. By and large these arrangements appear to have worked well, with only occasional problems encountered over the years. Ventures Upgrading Yugoslav Industry There are many examples of capable Yugoslav manufacturing enterprises that have tested and then increased their manufacturing capabilities in arrangements with foreign firms, which arrangements have then devel- oped into joint venture agreements. Such arrangements have often begun with the import of a foreign product to be offered at the ‘“‘top of the line”’ of goods being produced domestically. This was the case with Black and Decker hand tools imported by the Ljubljana trading company Teh- noimpex. With hard currency in short supply, a kind of countertrade was necessary to increase imports of the tools. A manufacturer was found in Grosuplje, Slovenia, that could meet Black and Decker’s exacting stan- dards and qualify as a supplier of components for its tools. Imports of Black and Decker tools increased, paid for in part by the export of components made in Grosuplje. In October of 1973 Tehnoimpex and Black and Decker formed a joint venture, revised in June of 1977, for the production, local sale, and export of parts and tools with substantial local content under the Black and Decker trademark. General Motors developed a comparable arrangement with the Yugoslav firm Livnica of Kikinda (Lztk, for Livnica Zeleza i Tempera 136 Yugoslav-American Economic Relations Kikinda). For many years Livnica manufactured castings for export to General Motors in West Germany and imported their Opel automobiles in return. In June of 1977 GM and Livnica signed a fifteen-year agreement for what was then the second-largest U.S. joint venture in Yugoslavia, valued at about $60 million. Shares in the venture agreement were split 51-49 between Livnica and GM respectively. The joint venture, called pa (for Industrija Delova Automobila or ‘‘automobile parts industry’’), built two new plants, which began production in 1979 and 1981 of castings and machined auto parts that were shipped to GM-Opel in return for finished Opel cars. 1pa’s profits came from the sale of these cars. GM maintained an office in Belgrade to supervise the operation, which remained profitable on the whole, despite sporadic problems such as customs difficulties with the importation of precision instruments for the ma factories or chronic problems such as Yugoslav price controls or Opel production slowdowns due to lags in the European economy. The Yugoslav firm Tigar of Pirot, an established tire manufacturer, had been manufacturing tires under license from the B. F. Goodrich Company for five years when the two firms signed a joint venture agreement in 1979. Goodrich closed and dismantled its plant in Koblenz, West Germany, which had been losing money, and brought it to Pirot as its investment in Tigar, together with technology and know-how for making steel-belted radial tires. The venture was technically successful and profitable as well, selling its tires both domestically and for export. Goodrich reinvested profits in the venture, and Tigar exported tires to the United States through a joint company it formed with a Florida firm. Tigar, a net earner of foreign exchange, nevertheless encountered some difficulties because of Yugoslavia’s chronic shortage of hard currency. Because its tires contained a high percentage of imported raw materials, foreign exchange regulations limiting the amount of the hard currency earnings it could retain for its own use threatened to shut the venture down in the mid-1980s, but the problem was resolved and the operation continued. Yugoslavia’s electronics industry includes several large and many smaller firms that have had long and successful relations with many Western, including American, companies. EI (Elektronska Industrija) Nis, the giant of Yugoslavia’s electronics industry, began producing television sets and other consumer electronic products under a variety of foreign licenses in the early 1960s, and in later years developed a broad range of its own technology which it licensed to other producers. The American firms Honeywell and GTE were two of many Western firms from Commercial Relations from the 1960s 137 which EI Nis obtained technology under license over the years. In 1979 and 1980, respectively, EI Nis entered into joint venture arrangements with these two firms. The agreement with Honeywell was signed in April, 1979, for the production of computers. Despite delays in production in 1980, when foreign exchange restrictions cut back the import of essential components from Honeywell, the venture went ahead, and a new plant producing computers was opened in April of 1982. Honeywell had a 30 percent share in the venture, EI Nis had 63 percent, and Progres, a Belgrade-based trading firm, 7 percent. EI Nis signed its joint venture agreement with GTE in May of 1980 to build a factory for the production of telephone switchboards. The factory, built in the Belgrade suburb of Zemun, was officially opened and began production in the spring of 1985. Two examples illustrated the mixed experience with joint ventures in the food industry. In April of 1980 General Foods and Agrocoop of Novi Sad, after preliminary market research, trial production, and mar- keting runs, signed a joint venture contract for the production of potato chips, Tang (the orange drink mix), and Post cereals. After three years, however, a combination of changed economic conditions and problems with government regulations controlling prices, foreign exchange, and imports had convinced the General Foods management that it was not possible for the joint venture to go forward on a profit-making basis. While terminating the joint venture, General Foods and Agrocoop contin- ued their business association as a trademark licensing arrangement. Post cereals never went into production, but Agrocoop continued to produce potato chips and Tang under license from General Foods. Big Mac in Belgrade Probably the most famous Yugoslav-American joint venture of the late 1980s was the one that enabled a McDonald’s restaurant finally to raise its golden arches in Belgrade on March 24, 1988. McDonald’s had been pursuing negotiations to open a restaurant in Yugoslavia for several years but ran into repeated delays. At one point in 1984, with federal approval in hand, it looked as if a McDonald’s, in partnership with the Yugoslav enterprise Prokupac, was ready to open its doors at a location on Kneza Mihailova Ulica, the traditional ‘“‘walking street” in downtown Belgrade. But local zoning authorities balked, reportedly holding that the Mc- Donald’s logo and decor were not compatible with the street’s traditional ambience. (Some Yugoslavs also speculated that local competitors, fear- 138 Yugoslav-American Economic Relations ing the McDonald’s reputation for cleanliness and efficiency, may have weighed in against the venture with the neighborhood authorities.) McDonald’s, undismayed, sought a new partner, and in 1986 signed a joint venture agreement with Generalexport (Genex), the giant trading firm. A new location was quickly found near the main transfer point for trams and buses to Belgrade’s two soccer stadiums, and a traditional building’s exterior was restored to its turn-of-the-century splendor while the interior was remodeled with modern oak and brass furnishings. For several weeks after first opening its doors, the Belgrade restaurant was, according to McDonald’s, its busiest in Europe. Based on this initial (if delayed) success, McDonald’s and Genex proceeded with plans for a second and third restaurant in Belgrade and for others throughout Yugo- slavia and elsewhere. In 1989, with Genex as a partner, McDonald’s began contruction of its largest restaurant worldwide to date, which opened in Moscow in January, 1990. Projects Outside the Joint Venture Framework: Krsko and Feni Many major production projects have been undertaken outside of the framework of joint ventures. Two such examples, the Krsko nuclear power plant in Slovenia and the Feni ferronickel plant in Kavadarci, Macedonia, both involved very large imports of equipment from the United States, encountered substantial problems, but had very different results. In the case of Krsko, the Croatian and Slovenian authorities decided in the early 1970s, with federal approval, to build a 600-plus megawatt nuclear power station that would benefit not only their two republics but, with the completion of a national power grid, the entire country of Yugoslavia. Yugoslavia’s energy needs were growing, and its best hydroelectric power reserves had already been developed. Moreover, hydroelectric power was seasonal and subject to wide swings of availabil- ity, depending on rain and snowfall to fill the water reservoirs. Yugoslavia needed more capacity for generating baseload electric power, and when the first oil shock in the fall of 1973 and spring of 1974 quadrupled the price of oil, a nuclear power plant seemed the best solution to this problem. The competition to supply the plant was fierce and included producers from France, Switzerland, Finland, and the Soviet Union, as well as the United States. The American firm Westing- house was the winner. In addition to quality, credit availability, and a hefty countertrade commitment, Westinghouse’s willingness to make maximum use of domestic contractors for plant construction, to supply Commercial Relations from the 1960s 139 much of the nonreactor equipment and related facilities, and to carry outa full training program in the safe operation of the power plant was very important to its winning the bid. The total cost of the project was over $700 million. Major funding came from a large consortium of American banks, with guarantees by the Yugoslav banks Ljubjanska Banka and Privedna Banka Zagreb (pz). Eximbank provided nearly $270 million under loans signed in July of 1974. The logistics of constructing the facility proved formidable. Many minor and some major mishaps occurred, with each side blaming the other as construction lagged behind schedule. Special routes had to be planned to avoid railway tunnels that were not large enough to accommo- date some components. A truck bearing others actually slipped off the roadway. When construction was finally completed nearly a year behind schedule (but more quickly than numerous comparable plants had been built in the United States), pre-start-up tests revealed a critical vibration in one of the steam generators. The vibration, which occurred when water jets struck a heating coil inside the generator, evidently represented a design flaw that had cropped up in other Westinghouse plants utilizing this same latest-design generator. Westinghouse sent the president of its power systems company, Gordon Hurlbert, to assure the Yugoslavs that Westinghouse would, if necessary, build a new steam generator from the ground up without cost to the customer in order to provide a power plant that functioned perfectly. Actually the steam generator was modified by relocating and increasing the number of water jets. Successful results of the next battery of tests were greeted with great relief. Remaining tests were successful, and the plant gradually increased its power generation to full-rated capacity, at which it continued to produce, with down time only for normal servicing and reloading. The Feni plant was not so successful. After careful market and mineral surveys, the government of the republic of Macedonia backed the building of Feni for the production of ferronickel alloys based on mining and processing the nickel ore deposits in the Kavadarci region. Arthur G. McKee was the American supplier of equipment valued at over $125 million, with over $55 million of Eximbank financing provided under an agreement signed in January of 1975. By the time the plant was com- pleted, however, the world price of ferronickel had fallen, due partly to the construction of excess capacity in the industry and partly to the world economic recession of the early 1980s. The Feni enterprise was finally declared bankrupt in 1984, while its international debt remained a 140 Yugoslav-American Economic Relations liability of the Republic of Macedonia and its principal bank, Stopanska Banka of Skopje. It was not clear for several years thereafter whether changes in the world markets would jusitfy reviving the operation; this possibility was being actively explored in late 1989 and 1990. Some Yugoslavs blamed the American company for what they called mislead- ing market and mineral surveys. One can also speculate, however, that an international joint venture might have been in a position to recognize the unfavorable market conditions more quickly and possibly cut its losses sooner (a la pINA), with less impact on Yugoslavia’s international debt position. Liberalizing the Joint Venture Rules in 1984 The slowdown in new joint ventures in the years 1978—84 (see Table 5.2) that we mentioned earlier can be traced to several factors. During the late 1970s loan capital was readily available, while in the early 1980s funds were generally scarce as the impact of the foreign debt crisis was felt. World business conditions also dampened foreign investors’ readiness to launch new ventures, whether in Yugoslavia or elsewhere. The joint venture legislation of 1978, however, was singled out by Yugoslavs and foreigners alike for its negative impact on foreign investment. On November 27, 1984, after more than a year of public discussion and debate, the Federal Assembly passed new amendments liberalizing Yugoslavia’s foreign investment legislation in several important respects: 1. The 49:51 percent rule was abolished, allowing the foreign partner to invest any appropriate amount short of 100 percent. The foreign partner remained limited to no more than half the seats on the manage- ment board, however. 2. Procedures for approving joint venture agreements were greatly simplified. Instead of having, in effect, a veto on joint ventures, the Federal Economic Chamber and other administrative bodies were re- quired to comment on proposed ventures within a strict time limit, after which the Federal Committee for Energy and Industry would render a decision. 3. Foreign partners would be exempt from several mandatory as- sessments and charges that were previously levied. 4. The health and recreational sectors, including tourism, were opened to foreign joint ventures (although insurance, domestic trade, and public services remained off limits). Provisions were retained forbidding ventures that restricted exports Commercial Relations from the 1960s 141 contrary to Yugoslav foreign economic policies or were contrary to Yugo- slavia’s defense or security interests, social plan, or technological devel- opment strategy.3° In general the 1984 amendments had the effect of shifting the pre- sumption back in favor of approval of an agreement as long as it was not shown to violate clearly stated prohibitions. This was in contrast to the difficult and complex task imposed by the 1978 law of winning a long and uncertain string of approvals. As Table 5.2 shows, the years immediately following 1984 saw a substantial increase in the number of new joint ventures formed with American partners. The Mixed Record of Joint Ventures Yugoslavia’s experience with foreign investment since its first joint venture legislation in 1967 has been uneven, both in the climate provided by Yugoslav official measures and business conditions and in the re- sponse by foreign investors. The ambivalence toward foreign investment, which was viewed sometimes as a threat and sometimes as an oppor- tunity for Yugoslavia’s socialist economy, recalls the uneasiness toward international trade noted earlier. The doubts about foreign trade were largely resolved by the 1970s in favor of trade, not just to export in order to pay for essential imports, but as a positive factor in strengthening the Yugoslav economy as a whole and making it more efficient. Some mis- givings about foreign investment persisted, however. We also noted a continuing tension between the goals of providing incentives to greater efficiency and profitability on the one hand and of minimizing risks and inequalities of results among the economic actors on the other. A similar ambivalence dogged the history of joint venture legislation, with the establishment and then the removal of such obstacles as limits on foreign partners’ profits and the virtual requirement that domestic competitors (through the Chamber of Economy) approve a joint venture agreement before it could be registered. Few ventures, especially in earlier years, represented a full involve- ment by the foreign partner, through investment of funds, equipment, and managerial and technical know-how, in the success and profitability of the joint venture. There have been notable exceptions, including the Tigar-Uniroyal Goodrich tire venture, Combustion Engineering’s several ventures with MINEL, and Dow Chemical’s ventures with 1Na and oKI. (It was, after all, Dow’s concern for profitability that led it to cancel pina.) What stood in the way? For some ventures it may have been the short time 142 Yugoslav-American Economic Relations span of the venture, for others internal problems between foreign partners and workers’ councils. Some ventures were limited by price controls or import restrictions. Thus for many ventures, as in the case of the model agreement cited earlier, the joint investment format was mainly a way to get industrial equipment or raw materials into the country. The foreign partner profited from its sales of these goods and the domestic partner from its own domestic sales, but the partnership itself produced few profits to be divided. Although domestic enterprises sometimes objected that official favoritism was shown to joint ventures with foreign partners, it could also be argued that some support was'justified for operations that foreign investors had identified as potentially profitable on the basis of their experience in the world market. Not all ventures so identified came to fruition. Some of the ventures listed with no ‘‘status’’ indicated in Table 5.2 never began operations; others are so identified. Still others, although signed and approved, lacked some factor essential to getting started and therefore do not appear in Table 5.2. Often this factor was domestic financing as, for example, in attempted ventures between Epstein Engineering and Bihaé of Bosnia, or between Bishop Graphics and Slavijaelectra. Similarly a major grain trading venture between Continental Trade Services and four agricultural kombinats in the Vojvodina foundered for lack of a key bank guarantee. The inability to secure a suitable location on the seacoast blocked a venture to extract sinter magnesite from sea water (which had been approved) between the firms of Hardison Walker and Magnohrom. Further Liberalization of Foreign Investment: 1988 Measures The 1984 changes in Yugoslavia’s joint venture legislation, significant as they were, were viewed as insufficient by many who had hoped for a wholesale revamping of the foreign investment rules. Many Americans and other foreign critics still found the foreign partner’s role in managing joint ventures too constrained to justify a major commitment of resources to such ventures; criticism was also aimed at other limitations, including restrictions on joint ventures’ ability to seek credit. From the Yugoslav side, too few ventures appeared to be attracting the kind of investments that could stimulate new activity and economic growth. The Yugoslav economy had stagnated heavily during the 1980s as it labored under a massive foreign debt burden and severe austerity measures that were part of various efforts at economic reform. Almost as soon as the 1984 amendments were enacted, therefore, Commercial Relations from the 1960s 143 work was under way to develop a much more far-reaching liberalization of the climate for foreign investment. Many of these changes, targeted for November 1988, were enacted before the end of that year. The most sweeping, which also required a constitutional amendment, opened the possibility of 100 percent equity ownership to foreign investors.3® Other provisions made the foreign investor’s interest transferable (reserving a right of first refusal to the Yugoslav partner), provided for the repatriation of profits and principal, and enabled the foreign investor to participate in management according to his investment share. Foreign investment was also permitted in privately owned enterprises and mixed enterprises of various legal forms (e.g., including both limited and unlimited liabil- ity).37 Approval (or disapproval) of proposed joint venture contracts was further expedited, with automatic approval unless action was taken by the federal authority in charge of foreign economic relations within thirty days of submission. In addition to constitutional amendments, changes were made in several other related laws, including the law on enterprises, the banking law, and the law on planning. The number of new foreign investment contracts increased markedly in response to the new laws, as was the case after the 1984 changes. Over 300 were signed in 1989, compared to 26 in 1988. While many of these were small investments in private businesses by individuals of Yugoslav origin living abroad, others were substantial; eleven from the United States totaled $20 million. At the close of the decade, however, it was still not clear whether conditions had been changed sufficiently to attract major new investments of the kind that leaders hoped would help revitalize their stagnating economy. Tax and other legislation was still pending, and some of the laws already passed had not yet been implemented. Earlier experience had shown that favorable economic and business prospects were also essential to attract foreign investors, implying that reform of investment laws must be accompanied by continuing economic reform across the board. In January of 1989 incoming Prime Minister Ante Markovié promised such thoroughgoing reforms and pledged that they would continue ‘‘at least five years’’ (a prime minister’s normal term of office). The reforms would seek to involve foreign investors in strength- ening and opening the Yugoslav market, since ‘‘there can be no domestic market isolated from the world market,” he said.38 During the course of 1989 and 1990, as severe political tensions mounted within Yugoslavia and dramatic political and economic changes swept Eastern Europe and the Soviet Union, the Markovic government continued on the course of reform aimed at creating a working market economy in Yugoslavia. We 144 Yugoslav-American Economic Relations shall return to these efforts in our final chapter, comparing them to similar developments in other countries. The U.S.-Yugoslavy Economic Council and the Yugoslav Economic Chamber — in Croatia, the Smederevo Steel complex in Serbia, the rent ferronickel plant in Macedonia, lignite-fired electricity-generating plants in Kosovo, and the Krsko nuclear power plant in Solvenia. While some of the projects were aimed at relieving shortages of electrical energy, there was no overall program of energy conservation or substitution to guide the course of industrial expansion in response to the first oil shock of 1973—74.6 Industrial plants included in this Five-Year Plan required large quantities of equipment to be imported from abroad at a cost in hard currency that was far beyond the ability of domestic foreign exchange markets to supply. Apart from the shortage of foreign exchange, it is arguable that even domestic savings in dinars were insufficient to meet the investment goals of the 1976—80 plan.” In any event, as foreign funds became available, discipline broke down, investment “voluntarism’’ became the rule, and even the plan’s inflated targets were widely ex- ceeded. In a widespread practice regional banks sold foreign exchange to produce dinars for the construction of roads, schools, universities, and even sports palaces in locations throughout Yugoslavia. Even projects that were worthwhile per se and aimed at solving real problems were too often inappropriate to the times and conditions or were carried out without an analysis of their business profitability or their capacity to generate foreign exchange to repay the capital that had been borrowed for their construction. Thus foreign borrowing got out of hand during the 152 Yugoslav-American Economic Relations second half of the 1970s. Total foreign indebtedness, which had been projected to reach $11.5 billion by the end of the 1976—80 Five-Year Plan, exceeded that figure by nearly 60 percent.? Borrowing Out of Control A number of factors can be identified as contributing to the breakdown of financial discipline over investment in construction and related foreign borrowing. These were (1) the low priority given to this issue by the top leadership of the federation, (2) ineffective mechanisms to monitor or control borrowing abroad by regional banks, and (3) the lack of power or incentive for restraint within the lending as well as the borrowing banks. The political events of 1971 were seen as a serious threat to the unity of Yugoslavia. The purpose of the decentralization of political and economic authority embodied in the Constitution of 1974 and subsequent legislation was first of all to preserve the union. Decentralization eased fears of heavy-handed central dominance and seemed to fulfill the promise that all nationalities could prosper under the Yugoslav banner. The party would presumably continue to provide unified political guid- ance. If foreign loans happened to be available to bear the economic cost of increased regional investments, so much the better. The strict controls on foreign borrowing that had previously been exercised through the financial network centered in Belgrade were vir- tually dissolved with the dispersal of this network. For example Yugoslav enterprises borrowing abroad through their banks were required to regis- ter their loans with the National Bank of Yugoslavia and to place interest- free dinar deposits with it, thereby at least in theory providing for a degree of control over such borrowing and increasing its cost. This control was vitiated to a great extent in practice, however, by the ability of many enterprises to gain access to substantial amounts of easy dinar credit throughout much of the 1970s and into the 1980s. Other firms borrowed foreign exchange abroad precisely to overcome shortages of dinars, which they obtained by selling the foreign exchange to the National Bank.!° The fact that foreign loans were ‘‘registered”’ with the National Bank was taken by foreign lenders to indicate that the National Bank approved and therefore assumed some responsibility for the loan. In point of fact, however, “‘registration”’ was granted indiscriminately on a routine basis. In the course of the general decentralization of national authority in the Paying the Piper 153 1970s, the ability of the National Bank to enforce limits on such bor- rowing—or even to keep accurate track of it—was seriously impaired.11 The Yugoslav commercial banks themselves were not ina position to exercise restraint. The impact of the general decentralization of power tended to reinforce their links with the very regional forces, political as well as economic, that were actively seeking funds from abroad. The conversion of Investbanka’s branch banks into independent investment banks for their respective republics was carried out precisely for the purpose of aligning these banks more closely with the local political authorities. The Banking Law of 1977 ratified this dispersion of spe- cialized bank functions and created a whole new set of institutions to take its place. Regional banking networks or ‘associated banks”’ were estab- lished in each of the republics and autonomous provinces (with the exception of Croatia, which had previously tried and rejected such a system). The Investment Bank’s branch in Zagreb became Privredna Banka Zagreb (pBz) and took on the functions of financing industrial investment as well as major commercial banking activities in Croatia. Jugobanka (the Bank for Foreign Trade) also became an associated bank’ and was allowed to retain, as its basic or member banks, the network of branch banks it had previously built up around the country. The number of banks authorized to do foreign business increased substantially. Under the Banking Law of 1977, each of the basic banks in an associated bank network became jointly and severally liable for the obligations of all of the other basic banks in the network. Moreover, each bank (associated, basic, or independent) was backed financially by the assets of its founding members—businesses that had put up its capital, provided the directors for its board, and were its principal depositors and borrowers. In one sense these successive lines of supporting liability which invoked the full faith and credit of the associated banks, basic banks, and founding member firms gave the appearance of providing a high degree of security to potential lenders. In another sense, however, the network of recourse was so extensive that the consequences of invoking it were unforeseeable and potentially dangerous.12 Banks in Yugoslavia have been described as ‘‘associations of enterprises . . . pooling their resources for mutual benefit. . . . The scope for indepen- dent decision-making, even by autonomous banks, (was) very limited.’’13 Foreign bankers commonly referred to Yugoslav banks as ‘“‘the cash windows of their founding members.” Thus the banks, lacking an inde- pendent role, acted as the instrumentalities of the political and business 154 Yugoslav-American Economic Relations leadership of their regions—exactly those leaders who were anxious to obtain capital to move ahead with their programs of industrial expansion. The experience of Privredna Banka Zagreb illustrates this tendency. As the successor to the Investment Bank’s branch in Zagreb, ppz became instrumental in financing many of Croatia’s ambitious industrial expan- sion projects, including those of ina (Industrija Nafte), the giant oil and chemical company based in Zagreb, as well as the Croatian half of the Krsko 600-megawatt nuclear power plant (a joint venture between the Croats and the Slovenes). As INA expanded psz was also involved in financing its oil imports and its enlarged oil refining facilities and petrochemical plants, including the joint venture with Dow Chemical Co. (pINA). Among Yugoslavs pBz was commonly referred to as INA’s “‘house bank.” As such ppz was expected to obtain loans to finance 1Na’s oil imports and the expansion of its various facilities, but it was not in a position to exercise independent judgment on the economic feasibility or advisability of going ahead with these actions. During the 1970s this pattern was repeated many times over throughout Yugoslavia, as local business and political leaders pressed ahead to realize their plans for regional industrial expansion. Without adequate foreign exchange re- sources available domestically to finance these ambitious programs, the newly independent and powerful local authorities looked to foreign sources for their investment capital. Petrodollar Loans Feed Yugoslav Foreign Debt By an unfortunate historical coincidence, just when so many Yugoslav borrowers looked for loans from abroad, the funds were available. The rapid and massive increases in the price of oil following the 1973 oil embargo suddenly brought vast amounts of new income to most oil- producing countries. The industrialized world needed a continuing supply of oil in large quantity, at least until it could adjust consumption levels to the new higher prices. On the other hand the oil producers sought to deposit the proceeds of their oil sales at rates of interest that would compensate them for pumping and selling oil beyond their imme- diate revenue needs.14 The banks that accepted these deposits and paid interest on them had an urgent need to relend the money—to “‘recycle the petrodollars.”” Thus Yugoslavia’s eager borrowers found willing lenders among the banks of the world, particularly of the United States. The point has been made that Yugoslavia’s foreign borrowing was not Paying the Piper 155 well coordinated or controlled during the 1970s. Clearly this lack of control encouraged much inefficient investment, including wasteful duplication of industrial facilities, and contributed to the debt crisis of 1982-84. There were also some positive aspects of Yugoslavia’s foreign borrowing during this decade, however. Industrial equipment supplied on credit by the United States and other Western industrialized countries (as well as some provided by the Soviet Union and some East European countries) made possible much of the expansion and modernization of Yugoslavia’s industrial plant and the country’s rapid industrial growth since the 1960s. Nearly 60 percent of Yugoslavia’s long- and medium-term foreign borrowing during the 1970s went to finance imports of industrial equip- ment. Financial credits accounted for 35 percent, and imports of raw materials, 5 percent. Industrial equipment purchased on credit accounted for two-thirds of Yugoslavia’s total imports during the decade.15 Finan- cial credits did much to mitigate the economic shock from the dramatic oil price rises of the 1970s. This shock was particularly severe for Yugoslavia, which relies on imports for over two-thirds of its petroleum. needs.1®© Long- and medium-term credits made up over 95 percent of Yugoslavia’s total debt, short-term credits less than 5 percent. The struc- ture of Yugoslavia’s debt shifted significantly from public to private creditors during the decade, and from guaranteed to unguaranteed obliga- tions (see Table 6.1). At the beginning of the decade of the 1970s, 19 percent of medium- and long-term debt was owed to international financial organizations (principally the World Bank and the European Investment Bank); this share declined to 13.5 percent by 1980. Meanwhile, debt to the socialist and opec countries became significant, rising from less than 1 percent to 13 percent and 5 percent of the total, respectively. Financial credits, Table 6.1. Structure of Yugoslavia’s Debt (totals = 100%) Year Public/private sources Guaranteed/Unguaranteed 1970 56.2/43.8 73.6/26.4 1979 29.2/70.8 31.8/68.2 Source: Dragana Gnjatovié, Uloga inostranih sredstava u privrednom razvoju Jugoslavije (Belgrade, 1985), pp. 95, 96. 156 Yugoslav-American Economic Relations which accounted for 28.9 percent of medium- and long-term debt in 1970, rose to a 42.1 percent share in 1980 and 51.5 percent in 1983.17 Bank lending to Yugoslavia followed a global trend in the latter half of the 1970s. Forced to relend unprecedented amounts of oil money, the banks lengthened the customary terms of their loans and moved increas- ingly into the unaccustomed (for commercial banks) area of project loans.18 Faced with a multitude of projects seeking funding, the interna- tional bankers had neither the time nor the specialized expertise to perform a full evaluation of each project they financed. In the case of Yugoslavia, they generally accepted the guarantee of banks authorized to do foreign business, relying on the legal recourse provided under Yugo- slav law against other banks in the associated bank network and against the founding members of each of the basic banks. They also relied on the Yugoslav government, which had authorized these banks to engage in foreign business, to do whatever might be necessary to protect the country’s credit rating.2° Syndicated Loans and Borrowing to Service Debts Toward the end of the decade, even as project loans continued,?! Yugo- slavia turned increasingly to syndicated financial credits for balance-of- payments support and to meet its mounting debt service burden.22 By the turn of the decade, paz had begun the practice of negotiating a number of “club” loans (i.e., each with several lenders) for the purpose of financing oil imports. These funds were also being used, however, to finance longer-term investments and to service pBz’s considerable and still- growing debts. Yugoslav indebtedness to Western banks increased by $1.4 billion during 1978 and by over 1.5 billion in 1979.23 A $420 million loan to a consortium made up of psz and all the associated banks in Yugoslavia was signed in January of 1980, and a $400 million syndicated loan was extended to the National Bank of Yugoslavia in December, 1980. At the end of 1981, Manufacturers Hanover Trust was seeking to orga- nize a syndicated loan to Yugoslavia that press reports put in the range of $400 to $500 million. Despite the prospect that the National Bank of Yugoslavia would be the borrower, several prominent banks that had joined in previous efforts declined to take part and the $300 million minimum target was not reached. The effort was abandoned in February, 1982, after four months of trying to put it together. According to press reports a Kuwaiti banking group did extend a $250 million credit to Yugoslavia in April, 1982. Paying the Piper 157 In that month Poland defaulted on its debt repayments, sending shock waves through international financial markets. These markets had already become very jittery as Romania had broken off negotiations with the mr and financial problems were multiplying on every hand. Mexican and Brazilian debts were reaching crisis proportions. Financial scandals and over-investment in oil projects were causing problems for banks in the United States and Canada,?4 and in Europe some German and Italian banks were facing failure.25 Thus beleaguered, the international financial markets were tightening up. Banks’ senior managements and boards of directors that had willingly approved substantial loans on the mere recommendation of their loan officers a few months previously put their loan officers on a much shorter leash and required substantially stronger justification for all loans. American Bankers Seek Reassurance In this atmosphere several American bankers who were familiar with Yugoslavia tried to keep the country from falling victim to the financial community’s sudden conservative swing. They were aware that the complexity and unfamiliarity of the Yugoslav banking system made Yugoslavia particularly vulnerable to the general tightening in the inter- national financial markets. Many bankers were likely to shy away from debtors whose circumstances they did not fully understand. One such circumstance was the fact that some Yugoslav banks had been less than meticulous about making their payments precisely on time and answer- ing correspondent bank inquiries promptly. Bankers who had been dealing with Yugoslavia for years were familiar with these practices, which they attributed to a shortage of highly skilled personnel in some of the numerous banks authorized to do foreign business. They were con- cerned, however, that the persistence of such problems could give rise to the perception that the country was experiencing liquidity difficulties. Such perceptions, if allowed to grow, could erode market confidence and impair Yugoslavia’s ability to borrow on the international market. If this happened and the country’s foreign exchange reserves became depleted, these bankers feared that Yugoslavia might be forced into a general debt rescheduling. To avoid this eventuality they considered it vital that Yugoslavia, whose situation differed greatly from that of either Poland or Romania, not be lumped together with those countries in a sweeping denial of credit.26 In an attempt to forestall such an eventuality, a delegation from the 158 Yugoslav-American Economic Relations Chemical Bank of New York traveled to Yugoslavia in April of 1982 to discuss with Yugoslav bankers and government officials their perception of the deteriorating international financial market. They suggested steps the Yugoslavs might take to continue being perceived as financially strong and credit-worthy despite what was happening in other countries. Principal among these were measures to be taken by Yugoslav commer- cial banks to eliminate any arrearages, however small or brief they might be, and to devise short-term and medium-term borrowing strategies in cooperation with the mr, foreign governments, and commercial banks that would provide balance-of-payments support and maintain foreign exchange reserves at a safe level. Unfortunately the constructive inten- tions of these bankers were misunderstood by some Yugoslav financial leaders. They considered the suggestions unduly intrusive and branded them derisively ‘‘the seven commandments,” and the mission had little effect. In a similarly unsuccessful effort in the United States, a few Ameri- can bankers familiar with the Yugoslav scene sought an authoritative U.S. government declaration distinguishing Yugoslavia’s situation from those of other countries, particularly Romania and Poland. They saw such an official distinction as particularly useful at the time; the U.S. government was then taking a firm stand against financial relief for Poland for both economic and political reasons, as the Polish government’s crack-down on the Solidarity movement was accompanied by severe economic de- cline. Responding to this concern, Undersecretary of State and former Ambassador to Belgrade (1977-81) Lawrence Eagleburger invited a broadly selected group of bankers to the State Department for a briefing on April 22. He stressed the differences between the Yugoslav and Polish situations and noted the importance the U.S. government attached to maintaining a normal flow of private credits to Yugoslavia. His remarks met with a mixed reception. Some officials in the Treasury Department were unhappy that Eagleburger had bypassed the Treasury in meeting with the bankers, and some bankers reportedly felt they were being pressured by the government to give Yugoslavia new credits.27 U.S. Response to the Debt Crisis — Jn Belgrade a more ominous cloud was appearing on the horizon. The American Embassy was making some calculations based on trends that were emerging in factors affecting the Yugoslav balance of payments, coupled with the deteriorating international financial market. The results Paying the Piper 159 of these preliminary, informal calculations raised the possibility that Yugoslavia might not be able to meet all of its international financial obligations in 1982. The summer tourist season still lay ahead, however, and another major loan syndication was being sought. At the beginning of June a team from Citibank visited Yugoslavia during the Dubrovnik meeting of the U.S.-Yugoslav Economic Council and agreed to attempt to put together a syndicated loan, which it was hoped would total between $300 and $400 million. The borrowers were to be five of the leading commercial banks in the country,28 with a guarantee provided by the National Bank of Yugoslavia. The minimum was set at $200 million. The first $100 million was committed relatively quickly, but it soon became apparent that the international market for syndicated loans had dramatically worsened. Bankers around the world were turning cautious in response to debt crises and bank failures in scattered locations throughout Europe and the Americas. In July the picture was greatly complicated when Privredna Banka Zagreb, one of the largest commercial banks in Yugoslavia, failed to make its payment on an oil facility loan, sending ripples of concern through the already hyper- sensitive banking community. Bankers concerned about Yugoslavia had an opportunity to compare notes at the October, 1982, meeting of the mF and World Bank in Toronto, Canada. According to participants pBz’s arrearage and the fact that the Citibank loan was still pending domi- nated these informal talks. Although international loan syndications were usually subscribed within two to three weeks from their announce- ment, the Citibank effort had still not been concluded in October, a fact that the bankers took as an ominous sign. The loan was eventually signed on November 26, and then for the bare minimum of $200 mil- lion.29 At the same time that it was urging a speedy conclusion to the Citibank loan, the Yugoslav government placed emergency restrictions on imports, and by July some industries were being forced to slow down because of shortages of raw materials.3° Fearful of the consequences of a debt rescheduling, government spokesmen vowed the country would pay its obligations in full. U.S. Embassy economists meanwhile refined their calculations as the tourist season proceeded and the Citibank loan lan- guished. Clearly it would only be subscribed, if at all, for the minimum $200 million. By September they found the conclusion inescapable: even if the loan went through, Yugoslavia would be unable to meet its obliga- tions coming due before the end of 1982, and the situation would worsen sharply in the first quarter of 1983.31 160 Yugoslav-American Economic Relations Confronting the possibility of a financial emergency bearing incalcul- able political as well as economic consequences, U.S. Ambassador David Anderson, who had replaced Eagleburger in 1981, decided to take action. In a private meeting with Yugoslavia’s Prime Minister Milka Planinc, he reviewed the embassy’s calculations and expressed his concern that Yugoslavia appeared to be headed for default on its international finan- cial obligations unless something were done to change the course of events. He then stated his intention, unless it would cause problems for the Yugoslav authorities, to send a message to Washington setting forth his assessment of Yugoslavia’s debt crisis, analyzing the consequences of a possible default and recommending that the United States call upon other creditor countries, together with their banks and the appropriate international financial institutions, to put together financial support measures that would enable Yugoslavia to meet its debts and maintain its economic viability and political independence. After a moment’s pause Mrs. Planinc replied, “‘That would not cause problems.”’ As Ambassador Anderson and his staff in Belgrade prepared the message they hoped would trigger a U.S. government initiative to help avert financial disaster for Yugoslavia, they were only vaguely aware of the complexities of the course that lay ahead. They were aware, however, that (1) Yugoslavia’s debts were owed to both public (government) and private (bank) creditors in several countries, so a broad-based solution would be required, and (2) creditors would be leery of offering assistance unless they saw that other creditors were doing likewise. American bankers had already in April told the U.S. government in effect to put up some of its own money before asking them to put up more of theirs. The ambassador’s message began with the statement, “Yugoslavia is at an economic and political crossroads’’ and was promptly dubbed the “Crossroads Cable” in Washington. It noted that Yugoslavia’s debt crisis came as the government had already mounted an austerity program that had brought two years of reductions in personal incomes and was slashing imports in a determined effort to meet the country’s interna- tional obligations. Meanwhile the international economic environment had turned unfavorable; interest rates and oil prices were soaring and recession in the Western countries had depressed demand for Yugoslav goods and services. The message noted that this was the first major crisis to be faced by the post-Tito Yugoslav government and that it was impor- tant to resolve it successfully in a way that contributed to constructive relations with the United States and with the West. Finally the message reminded Washington that Yugoslavia’s economic viability was essential Paying the Piper 161 to its continued independence and that its independence, strongly main- tained in a strategic part of the world, made a significant contribution to U.S. security interests. The ambassador therefore urged a substantial U.S. government contribution to a support package for Yugoslavia and sug- gested possible sources of funds, including Eximbank and commodity credit corporation (ccc) credits, the Exchange Stabilization Fund (ksF), and others, some of which would have required special legislation to implement. He urged the U.S. government to take the lead in order to set an example to be followed by other governments as well as by American and foreign banks. Selling the Support Effort in the West Key officials in the State Department were persuaded of the need to help Yugoslavia and set out to line up support in other agencies for a broadly based program. By early December agreement had been reached within the U.S. government and messages were dispatched to U.S. embassies in Bonn, Paris, London, and Rome to ask their host governments to join in providing necessary financial support. Secretary of Defense Caspar Wein- berger, who was in Belgrade on other business, delivered a letter to the Yugoslav authorities assuring them of support from the U.S. government. A special envoy from Undersecretary of State Eagleburger’s office, Dep- uty Assistant Secretary Charles Meissner, made trips to London, Paris, Vienna, and Bern to seek the support of those governments. At a U.S. chiefs of mission conference in London in December, 1982, the American ambassador to the Federal Republic of Germany (and former chairman of the Federal Reserve Bank), Arthur Burns, asked Ambassador Anderson to provide him with particulars on the Yugoslav situation for use in conver- sations with his long-time friend and colleague Karl Otto Poehl, president of the German Bundesbank. Responding to Anderson’s telephone request on a Saturday afternoon, the American Embassy staff in Belgrade pre- pared a telegram containing an analysis of Yugoslavia’s circumstances which was on Burns’s desk the following Monday morning. During November the International Monetary Fund (1m) had under- taken a parallel effort to apprise the principal creditor governments of Yugoslavia’s financial situation and enlist their participation in a finan- cial support effort. The chairman of the mr, M. Jacques Delarosiere, conveyed this appeal in a November 3 letter to the finance ministers and chief central bankers of the United States and many of the same creditor countries the United States was contacting. 162 Yugoslav-American Economic Relations A combination of compelling strategic, commercial, and financial reasons persuaded officials in the governments of the United States and other creditor countries of the need for a joint financial support effort to help Yugoslavia deal with its debt crisis.2 Under close analysis the potential consequences of Yugoslav default on its international obliga- tions appeared very serious indeed. Trade and other credit arrangements with the West would dry up, placing Yugoslav imports of raw materials, semimanufactures, spare parts, and industrial equipment on a cash-and- carry basis. With Yugoslavia running a substantial current account deficit in convertible currencies, its imports of essential goods from hard cur- rency countries would plummet, causing a traumatic slow-down of domestic industrial and commercial activity; this in turn could lead to serious domestic social and political unrest. Merely to survive Yugo- slavia would have no choice but to expand rapidly its barter and clearing account trade with the Soviet Union and its East European allies on whatever terms were available. In practical terms this would amount to a virtual economic return to the Soviet bloc, with possible political conse- quences as far-reaching as they were ominous. It was also evident that in the absence of some assistance from the creditors, draconian efforts by the Yugoslav government to avoid default would have virtually the same effect as default itself. The diversion of all available foreign exchange into debt servicing would force a drastic reduction in imports, a general winding down of industrial activity, and a consequent turning to the East for such necessities as could be had under various barter and clearing trade arrangements. An additional financial concern also weighed heavily with several West European creditor coun- tries. With Poland and Romania already in the default column and international banking confidence plummeting, a Yugoslav default could trigger defaults in Hungary and elsewhere as lending banks failed to renew short-term credit lines. Such a development would have posed a real threat of bankruptcy to some West European and particularly German banks with large East European loan portfolios. In the world of finance, rumors of problems can become self-fulfilling prophecies, as depositors withdraw from ailing banks or lenders pull out (i.e., decline to renew) short-term credits to a firm or country in debt trouble. For this reason and as Yugoslavia’s financial situation worsened toward the end of 1982, information on the crisis and proposals to help relieve it were treated as highly sensitive. Governments, banks, and international financial institutions tried to keep their communications with each other confidential. These efforts were not always successful, Paying the Piper 163 however. Early in December, Yugoslav Vice Premier Zvone Dragan left the office of Undersecretary of State Lawrence Eagleburger where he had just completed one of several meetings with U.S. government officials. Eagleburger, recalling the confidential nature of the financial discus- sions, added a friendly aside, “‘I hope I won’t be reading about this in the Belgrade papers,” and Dragan assured him the matter would remain “‘top secret” on the Yugoslav side. That was Friday, December 4. The following Monday, December 7, The Wall Street Journal carried an article headed “U.S. Preparing Rescue Package for Yugoslavia,’ which quoted extensively from the confidential State Department telegram instructing American embassies in several European capitals to seek their host governments’ cooperation in the effort. Eagleburger, furious, directed aides to find the source of the leak, but the culprit was never positively identified. Fortunately this publicity did not disrupt assistance plans as some had feared. Although the official assistance effort was first conceived as involving a small group of five or six countries that could decide and act quickly to help ease Yugoslavia’s debt crisis, other governments became interested as word of the effort spread, and the group that came to be known as the ‘‘Friends of Yugosla- via” gradually increased to fifteen and later sixteen countries.3? Mean- while some bankers who had begun to have misgivings about the coun- try’s situation’ were encouraged by reports that governments were considering action to provide financial support. Putting a Package Together It was one thing to agree on the desirability of a financial effort to support the debt-beleaguered country; putting it together was another matter. Questions to be resolved included the size and scope of a package, the roles of the various creditors and how they would be coordinated, and what terms and conditions would be attached to the financial assistance. Estimates varied widely as to the size of the package that would be needed.?4 It had been apparent from the late summer of 1982, however, that the $200—$400 million debt servicing shortfall in prospect for 1982 was only the tip of the iceberg. As one Western diplomat put it, “If you make it through 1982, your prize is that you get to face 1983.” Yugo- slavia’s $20 billion foreign debt was heavily front-loaded; the repayment burden (including principal and interest) was estimated to average more than $5 billion per year for the years 1983-86. Payments of interest and principal for 1983 were estimated at $4.9-$5.4 billion; some three- 164 Yugoslav-American Economic Relations quarters of this amount would be coming due in the first half of the year, before tourist receipts (always a key element in Yugoslav balance-of- payments calculations) would be available to help provide foreign ex- change. Yugoslavia’s ability to earn hard currency was uncertain. Exports of goods had slumped with the economic recession in Western countries, and tourism fluctuated in response to economic conditions and changing trends among vacationers. Remittances from Yugoslav workers abroad (a billion-dollar balance-of-payments item) were another question mark. Would they dry up when Yugoslavia’s debt problems became public? In short, it was not clear exactly how much assistance would be re- quired. The creditors were numerous and a varied lot. The debts owing to them varied by types and amounts, as did the financial support they were in a position to provide. Of the sixteen countries that eventually joined the effort, most had provided substantial supplier credits, credit guaran- tees, financial credits, or a combination of these. More than 500 banks from several countries had provided loans, some directly or as members of small “‘clubs’’ or unpublished syndications, others as agents or (the vast majority) participants in syndicated loans. The value of their interest in Yugoslavia ranged from a few million dollars or less to hundreds of millions of dollars, and their concerns varied from a desire to get out as quickly and cheaply as possible to a vital stake in the country’s long-term viability. As noted above, both bank and government creditors were concerned not to be in the position of bailing the others out (i.e., making new credits available or providing a temporary suspension of payments coming due while other creditors were being paid on schedule). Further burden- sharing questions included whether to count private bank credits guaran- teed by an official export credit organization as official or private, and whether to exclude recently concluded loans (such as the Citibank-led syndication) from rescheduling. Indeed the question of rescheduling existing obligations versus supplying new credits was itself an issue. Despite the diversity of their circumstances, the creditors generally shared an interest in assuring that whatever steps they took would be appropriately balanced by the actions of other creditors and that the total would be sufficient to keep Yugoslavia from going into default. They also wanted to provide strong incentives for Yugoslavia to take the economic policy steps necessary to end the crisis and return to normal economic activity, including making regular principal as well as interest payments on its international debt. Paying the Piper 165 Enter the IMF Thus while the myriad of creditors—most major Western countries and literally hundreds of banks—were agreed on the result they wanted to achieve, and generally each was willing to do its part, major tasks of leadership and organization lay ahead. The dimensions and elements of the package had to be established, and all of the participants had to be persuaded to play their assigned roles. From the Yugoslav point of view, the process could not be dominated or even be seen to be dominated by any Western government or by the Western commercial banking commu- nity. It became clear early on (i.e., well before the end of 1982) that only the International Monetary Fund was in the position to play the role of designer and coordinator of the overall financial effort. The mmr had access to financial information that was not readily available to other creditors. Moreover only the mmr was in a position to confer with the Yugoslav authorities and develop with them performance criteria that would assure all the participants that the resources they were devoting to the project would in fact be used effectively to rehabilitate Yugoslavia’s position in the international financial community. Before the end of 1982, imF Vice President L. Allen Whittome had begun to sketch the outlines of the program as it would eventually take shape. Whittome, who headed the fund’s European division, had been following events in Yugoslavia for several years and had been directly involved with the standby agreement Yugoslavia negotiated with the mmr in 1979. As world financial conditions continued to deteriorate in the fall of 1982, Whittome became concerned about Yugoslavia’s financial situa- tion and included Belgrade in a scheduled trip to several European capitals in October. Discussion of Yugoslavia’s balance of payments for 1982 and its cash flow projections for 1983 with National Bank Governor Radovan Makié only increased Whittome’s misgivings, which he then discussed with Prime Minister Milka Planinc. Arguing that Yugoslavia would not be able to make its international payments on schedule, he suggested that under the circumstances the best course of action would be to stop all payments as soon as possible and ‘‘talk to your friends, especially the United States,” to get some help with the impending debt crisis.5 Upon returning to mmr headquarters in Washington, Whittome presented his view of Yugoslavia’s circumstances and the need for a coordinated financial support program to his boss, mF President Jacques Delarosiere. Delarosiere told Whittome to proceed to organize such a 166 Yugoslav-American Economic Relations program, and the above-mentioned Delarosiere letter to the major creditor governments was dispatched shortly thereafter, on November 3, 1982.36 Whittome then embarked on a series of informal meetings with several creditor governments on the one hand and with major bank creditors on the other. Beginning in Washington, he found the Depart- ment of State (influenced, presumably, by Ambassador Anderson’s mes- sages from Belgrade) already strongly in favor of a support program for Yugoslavia and the Department of the Treasury receptive to the need for some such program. In his approaches to French, British, and German authorities, he found them in agreement that some action must be taken. Selecting the chair of a government creditors’ group, however, presented a problem. Traditionally when debtor countries ran into repayment difficulties, representatives of the official creditors met in Paris to arrange a rescheduling of debt payments at the invitation and under the chair- manship of the French deputy minister of finance. These procedures had become known unofficially as the ‘‘Paris Club.’’37 In Whittome’s first discussions with French officials, they immediately offered to chair a creditors’ group for Yugoslavia, possibly assuming that a Paris Club rescheduling was in prospect. The Yugoslav government, however, considered it important to avoid a debt rescheduling under Paris Club auspices at the time. When the Planinc government took office in May of 1982, there still appeared to be some possibility that Yugoslavia would be able to meet its international payments on schedule, given continued access to the international finan- cial markets that included the renewal of short-term lines of bank credit. The newly installed government therefore made a strong pledge that it would not reschedule its international debts but would meet its payments on schedule. This, it hoped, would differentiate Yugoslavia from coun- tries that were defaulting on their debts or seeking rescheduling (e.g., Poland, Romania, Mexico, and Brazil). The no-rescheduling pledge was repeated during the spring and summer of 1982 even as the conditions under which it might have been fulfilled (i.e., continued normal access to credit) began to disappear. U.S. bank exposure in Yugoslavia dropped by more than $600 million in the first half of 1982;38 the country’s foreign exchange reserves dropped by over $800 million in that year.39 Neverthe- less, the new government felt it would be subject to domestic criticism for weakness or lack of resolve if it did not deliver on its pledged word.?° Paris Club rescheduling procedures were also perceived as anathema in Belgrade for another reason. Virtually all of the Paris Club members, and particularly its chairman, represented NATO countries (France’s self- distancing from the NATO command structure notwithstanding). Submit- Paying the Piper 167 ting to Paris Club procedures was thus regarded in Belgrade as incon- sistent with Yugoslavia’s nonaligned status. Founding the Friends of Yugoslavia The creditor governments were sensitive to these concerns of the Yugo- slavs, but the task of organizing a support effort was thereby made more complicated. In lieu of the Paris Club, a special group was now formed to represent most of Yugoslavia’s governmental creditors. This group was referred to formally as the Yugoslavia Consolidation Group and in- formally as the Friends of Yugoslavia. In contrast with a Paris Club debt rescheduling exercise, the Friends would have as a major goal the provision of new money or credits necessary to see Yugoslavia through its liquidity shortage. Once the traditional Paris Club venue was discarded, France withdrew its offer to chair the creditors’ group. At that point everyone seemed reluctant to take the chair, based on the likelihood that the country chairing the group would be expected to take the lead in providing new money. Whittome explored these issues in several Euro- pean capitals, as did the U.S. State Department’s Charles Meissner. Eventually the Swiss agreed to take the chair and the Friends of Yugosla- via came into being. Structuring the negotiations with the bank creditors was complicated greatly by the fact that there were literally hundreds of banks involved. Whittome had obtained a printout of Yugoslavia’s bank creditors from the Yugoslav National Bank, which he reviewed with representatives of the bank with the largest individual exposure in the country, Manufacturers Hanover Trust (MHT) of New York. Subject to approval by the Yugoslavs, MHT began to organize an International Coordinating Committee (icc) of bank creditors. Under past practice such committees had usually consis- ted of one bank from each of the major creditor countries. In this case that would have meant one each from the United States, the United Kingdom, the Federal Republic of Germany, France, Italy, Switzerland, and Japan. But several American banks balked at this arrangement, claiming that their individual exposure in Yugoslavia was greater than the national totals of some other countries. These banks were not willing to have their interests represented by a major competitor, even one from the United States. Eventually, in addition to one bank from each of the other countries named above, the International Coordinating Committee in- cluded six banks from the United States as members: Manufacturers Hanover Trust (chair), Bank of America, Bankers Trust, Chase Manhattan, Chemical Bank, and Citibank, plus two, Marine Midland and Security 168 Yugoslav-American Economic Relations Pacific, as observers. A further organizational issue to be resolved in the icc was the question of voting—if by majority, whether by country, number of creditors represented, or amount of exposure in Yugoslavia. The group’s agreement to proceed by consensus doubtless prolonged its deliberations as the Yugoslav debt negotiations proceeded, but it was followed as a precedent in subsequent negotiations with other debtor countries. Meeting with the Creditors In January of 1983 two meetings were convened in Swtizerland in which Yugoslav officials and representatives of the imr met with representatives of the creditor governments and banks. At the governments’ meeting, convened by the Swiss in Bern on January 15, 1983, representatives heard a presentation of Yugoslavia’s circumstances and agreed in principle to provide substantial new resources—some in cash or untied credits, but most in supplier credits tied to exports from the country providing the credit. A tour de table produced estimates that $1 billion in new official credits might be forthcoming in addition to a rollover of about $300 million in official debts coming due. While the figures put forward by the representatives at Bern were nonbinding ‘‘best estimates”’ of what their governments expected to be able to do, they did represent a good-faith commitment that provided a basis for the banks to go forward in their meeting with some assurance of at least a rough parity between the efforts of the banks and the governments. The meeting of the bank creditors was called by Yugoslav authorities with the mr also present. The first meeting took place in Zurich, in facilities made available by the Swiss National Bank, on January 17, 1983, and lasted for several hours.* After the group was formally organized and MHT invited by the Yugoslavs to act as coordinator, discussion focussed first on the amount of new money to be provided. Estimates of what was needed varied considerably. In an informal session before meeting with the Yugoslavs, and also in the meeting itself, the nmr’s Whittome argued for a figure in the range of $750 million to $1 billion; the bankers had been thinking of a smaller sum, between $300 and $500 million. The Yugoslav negotiators did not put forward a specific figure. Agreement was finally reached on $600 million. When negotiations turned to the refinancing of obligations coming due, an issue arose among the creditors: which if any obligations would be exempted from rescheduling and paid on schedule? Payments due to Paying the Piper 169 the mmr and World Bank would not be rescheduled, but new loans from these two in excess of repayments would provide net credits to Yugosla- via. Participants in the $200 million syndicated loan led by Citibank argued that this loan should be exempted, since it was put together with great effort while the Yugoslav authorities were pledging to meet all obligations on schedule. A similar claim was made and allowed for a $100 million French loan also completed in 1982. In general obligations undertaken before November 20, 1982 (referred to in bank jargon as the “‘claw-back date’’) were agreed to be rescheduled; those signed after that date (including the Citibank and French loans), as well as mF and World Bank loans, were to be repaid. As has been noted, the first aim of the creditors’ meetings held in January, 1982, was to confirm the general commitment of all the creditors to a balanced and appropriate financial support effort for Yugoslavia in which the burden of assistance would be shared with reasonable equity and the overall level of support would be sufficient to get the job done. Negotiations at this stage were to establish parity of the quality and amount of assistance to be provided, both between the two groups, governments and banks, and among the governments and banks, respec- tively, within those groups. An immediate standstill or suspension of debt repayments owed by Yugoslavia was agreed in the January meetings. It was originally agreed for ninety days and was later twice renewed for like periods. This provided immediate relief for Yugoslavia and also assured all creditors that they would be treated equally with other creditors when payment due dates came up. The provision of $600 million in new loans by the literally hundreds of banks that already had loans outstanding to Yugo- slavia also raised the issue of parity among creditors. The banks on the International Coordinating Committee agreed to seek the new money through a pro rata assessment of all creditor banks in proportion to the amounts already owing to them. This involved first the Herculean task of compiling all loans outstanding as of the base date (November 30, 1982), calculating $600 million as a percentage of that total (it amounted to 8.75 percent), and then asking each of 542 banks to contribute an amount equal to 8.75 percent of its Yugoslav portfolio to the new $600 million loan syndication.42 Assessing new money from the lending banks then re- quired hundreds of hours of telephone time, down to the lowest amount assessed of $211. Remarkably all but two of the 542 banks lent their full share, and the two exceptions made equivalent loans outside the icc agreement.#2 170 Yugoslav-American Economic Relations Harnessing a "“Five-Legged Horse” In addition to arranging for the banks’ and governments’ meetings in Switzerland, the mmr’s Whittome had laid the groundwork with three international financial institutions, the mmr, the World Bank, and the Bank for International Settlements (Bis), to play essential coordinated roles in the effort. What eventually emerged was a linked support program implemented by five different participants or groups of participants: the bank creditors, the governmental creditors, the mmr, the World Bank, and the pis. Participants in the process, Yugoslavs and others alike, took to calling the support package the “beast with five legs”’ or the ‘“‘five-legged horse.” The banks would provide $600 million in new financial credits and would refinance some $1.4 billion in medium- and long-term maturi- ties. In addition, they would keep renewing for two years some $800 million of outstanding short-term obligations (of which approximately $525 million was trade related). The governments would refinance some $300 million in 1983 maturities and make available $1 billion in new credits, of which some $830 million were to be supplier credits. The mr would lend $600 million under a new standby arrangement, and the World Bank would make a Structural Adjustment Loan (sa) of $275 million. The Bank for International Settlements, the “central bankers’ bank” located in Basel, Switzerland, would lend $500 million in “up- front” money to be repaid within six months, which Yugoslavia could utilize while the time-consuming process of arranging the other credits, especially supplier credits, was proceeding. Thus the total Yugoslav financial package for 1983 (not counting the $500 million Bis loan, which had to be repaid during the year) would total more than $4.5 billion. All of the creditors made their participation conditional on Yugo- slavia’s negotiating and performing a standby arrangement with the mr. To avail itself of the $600 million in fund resources, Yugoslavia would be required to consult with mr experts concerning its economic policies and to negotiate with them a set of performance criteria (to be specified in a letter of intent to the mF) that it would then have to meet in order to trigger the release of each successive installment or tranche of mF credits. The IMF ‘‘Good Housekeeping seal of approval’’ on Yugoslavia’s economic policies, represented by its ability to make regular mr drawings, was even more important than its $600 million (as important as that was), because all the other resources in the package were keyed on the standby. Even after the participants had agreed on their respective roles, Paying the Piper 171 months of arduous negotiation still lay ahead. With the mmr, economic policy measures would touch delicate issues of respecting Yugoslavia’s national sovereignty. With the banks, terms and conditions of repayment of new and rescheduled loans had to be negotiated. As to official debts, each creditor government had to reach agreement with Yugoslavia on the terms and conditions under which it would refinance existing debts and on the form and terms of new credits. IMF Conditionality and Subsequent Agreements, 1983—88 —The negotiations of an mr standby agreement were delicate and difficult. On the one hand control over the principal instruments of economic policy, such as money supply, interest and exchange rates, prices and credit, is a vital part of any government’s sovereignty, with social and political as well as economic imperatives for its preservation. On the other the mmr negotiators saw certain policy moves in precisely these areas as essential to correcting some of the problems that had led to Yugoslavia’s debt crisis in the first place. Domestic inflation without corresponding changes in the dinar exchange rate had raised the price of Yugoslav exports and made imports artificially attractive, with negative consequences for Yugoslavia’s balance of payments. Domestic interest rates lower than the rate of inflation encouraged an increase in borrowing, which further fueled inflation. These interest rates also distorted the allocation of resources, as did administered price controls. The mF ne- gotiators therefore sought the Yugoslav government’s commitment to the following as a condition for the disbursement of successive tranches of the $600 million standby credit facility in 1983: 1. Higher domestic interest rates, gradually to equal or exceed the rate of inflation 2. Devaluation of the dinar and subsequent maintenance of a floating exchange rate that would compensate for domestic inflation, in order to improve the country’s international balance of payments 3. Tightening of domestic credit and money supply to attack inflation 4. Gradual easing of administered price controls to allow a greater market influence on resource allocation Taken together these measures all spelled still greater stringency for a populace that had already been subjected to three straight years of economic belt-tightening. No one could tell exactly how much more austerity was politically tolerable. The Yugoslav negotiators (cabinet and 172 Yugoslav-American Economic Relations subcabinet officers of Prime Minister Planinc’s government) recognized the need to reorder their economy; indeed the goal of the stabilization program already underway was to strengthen the operation of market forces. But they thought mr negotiators were pushing them to the danger point. The Yugoslav negotiating positions had to be approved, not only by the twenty-two-member Federal Executive Council (FEc) or cabinet, but on essential points also by the state presidency (the nine-man committee comprised of one representative from each of Yugoslavia’s eight constitu- ent republics and provinces plus a representative of the Yugoslav League of Communists), which bore the ultimate responsibility for determining how much stress the Yugoslav body politic could bear. The IMF negotiating team, with all of its bargaining power from its standby arrangement that was the essential element in the program to save Yugoslavia’s international solvency, had no desire to press the Yugoslavs beyond the point of political tolerance or economic feasibility. It was hard for them to evaluate, based on their brief time in the country, the Yugoslavs’ claims that they were being pressed beyond their limits. To avoid an impasse the negotiators on each side had to try to find issues on which the other might have some flexibility, those on which there were none, and aspects of its own position that might allow for trade-offs. As the negotiations wore on during the early months of 1983, during which the chief imr negotiator, L. A. Whittome, made several trips to Belgrade, both he and his Yugoslav counterpart, Vice Premier Zvone Dragan, discussed their negotiating problems separately and very infor- mally from time to time with American Ambassador Anderson. On some issues, in response to their questions, Anderson was able to indicate what he thought were likely to be the bedrock positions of the other side and why a particular point was being so firmly held. Occasional informal meetings of this nature were also held with the Swiss ambassador to Belgrade, Alfred Hohl. Gradually the two sides edged toward agreement in all of the areas noted above, quite probably aided by these late-night “non-negotiating”’ sessions.*4 Because of sensitivity in Yugoslavia on the issue of foreign involve- ment in domestic economic policy making, the terms of the 1983 mF Standby Agreement—the “‘conditionality” for drawing on the $600 mil- lion mF credit—were not made public. Even as the necessary legal steps were taken to raise domestic interest rates, devalue the dinar (some 30 percent in 1983), tighten domestic credit, and ease price controls, these measures were advocated and justified by rec (cabinet) members and others as being essential to Yugoslavia’s own economic stabilization Paying the Piper 173 program—which they were. Their connection to the mr, however, was not mentioned in public. Predictably, keeping the imFr connection quiet gave rise to some awkwardness. For example the objective reason for requiring the dinar to be devalued was to improve Yugoslavia’s price competitiveness in the world and thereby improve its balance of payments. The amount of the devaluation required by the agreement was based on Yugoslavia’s prelim- inary balance of payments statistics for 1982. When the final 1982 figures appeared in March showing a substantially greater 1982 deficit than the preliminary figures had revealed, mr officials returned to Belgrade to insist on a more rapid devaluation of the dinar. Yugoslav officials then had to go to the Federal Assembly for a further amendment of the law devaluing the dinar, but the vF was not mentioned, at least not in public. Months later, when Finance Minister Joze Florijancic made his mid-year economic report to the presidency of the League of Communists (also composed of representatives of each of the six republics and two pro- vinces), he cited several measures being taken that were required by Yugoslavia’s agreement with the Fund. The published accounts of his report made no mention of the mmr.45 Agreement with the Western Banks The general outlines of an agreement between Yugoslav and foreign banks had been established in Zurich in January. The Western commercial banks would provide $600 million in new credits and would reschedule some $1.4 billion in medium-term obligations, with principal payments to begin in 1986 and extend over a three-year period. Banks would roll over (i.e., relend) outstanding short-term credits at least until 1987. An international accounting firm*® was chosen to reconcile the records of the nearly 600 banks (Yugoslav and foreign) that were involved. Other terms and conditions including interest rates, fees, and many technical matters were agreed during subsequent negotiations in Belgrade, and by mid- March it looked as if an overall agreement might be in sight. However the presentation of a draft final text by the creditors posed further serious problems, which boiled down to two. The draft agreement required the Government of Yugoslavia as the guarantor of the agreement to (1) submit to the jurisdiction of a New York court, and (2) agree to waive its sovereign immunity. Political authorities in Belgrade were unable to accept these provisions in their original form; they gave at least the appearance of restricting Yugoslavia’s sovereignty. The Western banks on the one hand 174 Yugoslav-American Economic Relations were unwilling to accept the possibility that they might be denied recovery of their assets by a claim of sovereign immunity on the part of the guarantor. Negotiations stalled, and a further negotiating session in London in June failed to break the deadlock. Finally, at the end of June in New York, the negotiators compromised on new language, which the Yugoslav side agreed to submit to their authorities. Recourse to courts in London or Belgrade was added to those of New York. The words “‘sovereign immunity” were eliminated from the guaranty document, replaced by an undertaking to treat obligations under the agreement as ‘‘commercial activities’—which under international law would exclude them from a claim of sovereign immunity in any event. The Yugoslav Federal Executive Council (cabinet) requested a grant of signing authority from the Federal Assembly (parliament), which debated the resolution on Friday and Saturday, July 1 and 2. (Since July 4 is a Yugoslav national holiday, the legislature was in session over a long holiday weekend.) After marathon sessions that included speeches by Prime Minister Milka Planinc and Deputy Prime Minister Zvone Dragan explaining that there was no other way out of Yugoslavia’s debt cri- sis, the Federal Assembly finally approved the agreement in a session that ended at 3:40 in the morning on Sunday, July 3.47 The agreement itself was signed in July, but it still had to be translated into action by the banks. After delays in August by some reluctant banks, the final arrange- ments to reschedule loans of $1.4 billion and extend new credits of $600 million were concluded with 542 banks in ten cities around the world on October 6.48 Recycling Credits from Governments and the World Bank Negotiations with the mmr and the commercial banks had been the most difficult; compared to these the arrangements for the other three “‘legs”’ of the “‘five-legged horse” were relatively straightforward. The International Bank for Reconstruction and Development (1BRD or World Bank), for example, already had extensive experience in Yugoslavia. Its executive directors approved the $275 million Structural Adjustment Loan on June 28, and the documentation was executed on July 7.49 The remaining “legs” were not without their complications, however. Out of the $1.3 billion in financial assistance agreed to in January by the representatives of fifteen governments in Bern, some $1.1 billion was actually committed in bilateral negotiations between individual governments and a negotiat- ing team from the Yugoslav Ministry of Finance. The discrepancy in these amounts, as well as some delay in the negotiations, stemmed largely from Paying the Piper 175 the fact that several countries wished to provide their assistance in the form of credits for the sale of industrial equipment.®° The Yugoslavs, on the other hand, needed raw materials and intermediate goods that could be quickly processed into products for export to hard currency markets. To maximize their export return, credits from each of the Bern group of countries as well as the $275 million Structural Adjustment Loan (sAL) from the World Bank were assigned to be managed by one of Yugoslavia’s major banks authorized to do foreign business. Jugobanka, for example, managed the credits from the United States, Ljubljanska Banka the German credits, Sarajevska the British, Zagrebacka the Italian, and Be- obanka the French as well as the World Bank saL.>1 Under the supervi- sion of Assistant Secretary for Foreign Trade Vinko Mir (himself a banker from Ljubljana), the banks were required to lend these credits to manufac- turers that would incorporate the raw materials or components purchased with the credits into manufactured goods for the Western market. According to the Yugoslav press, some manufacturers that had com- plained earlier about the lack of foreign exchange to purchase necessary materials from abroad were slow to utilize these credits made available by the ‘“‘Bern governments”; some commentators found this unusual.52 We must remember, however, that many Yugoslav manufacturers had slipped into the relatively easy pattern of either selling domestically or exporting to Eastern or developing countries under so-called clearing or quasi-barter arrangements and that the commitments to export to the West the goods derived from these credits were being very strictly enforced. It is therefore not surprising that manufacturers made sure of their export contracts before taking on dollar, Deutschmark, or pound sterling loans that they would have to repay in those currencies. In fact the U.S. credits administered by Jugobanka and the World Bank saL administered by Beobanka were utilized quite quickly and efficiently. The U.S. assistance consisted mainly of some $190 million worth of Commodity Credit Corporation (ccc) credits available for the purchase of U.S. agricultural commodities. Repayment was due after three years; commercial lenders were protected by a U.S. government guarantee of 92 percent of the principal repayment.®? American cotton, hides, and skins were raw materials frequently purchased under this program by Yugoslav manufacturers and exporters of textiles and leather goods. Jugobanka typically made one-year loans to the Yugoslav manu- facturers, who were able to obtain their cotton (or hides), manufacture their textiles (or shoes), sell them for hard currency, and repay the loan within the one-year term. At this point the money became available for relending to the same or different manufacturers for two or more addi- 176 Yugoslav-American Economic Relations tional cycles before the original loan had to be repaid. The World Bank loan was utilized in similar fashion5+ (through Beobanka), also in many cases with American commodities.55 There were several other successful examples of financial and sup- plier credits by the ‘“‘Bern governments” once the program got un- derway. In all some $600-700 million of the $1.1 billion committed under the Bern agreement took the form of suppliers’ credits for raw mate- rials and intermediate goods. Virtually all of it was utilized, roughly half in 1983 and half in 1984. Of the remaining amounts, some $170 million in new financial credits were pledged and virtually all uti- lized; something less than half of $200-plus million in export credits for certain capital and consumer goods imports was eventually utilized, fora total of approximately $950 million in assistance from the Bern pack- age.°& The BIS Up Front The Bank for International Settlements (Bis) located in Basel, Switzer- land, is sometimes referred to as the ‘“‘central bankers’ bank.” It is funded from the central banks of the Western World’s major financial powers and governed by their central bankers. To preserve international financial stability, it is able quickly to make highly collateralized loans in large amounts. Its chairman in the early 1980s was Dr. Fritz Leutwiler, also chairman of the Swiss National Bank. The key role played by the bis in the 1983 financial support effort for Yugoslavia was to provide up-front operating funds the Yugoslavs-could use (their own foreign exchange reserves having been drastically depleted in 1982) until other elements of the support package were in place. The Bis agreed early in 1983 to provide the Yugoslav National Bank with six-month “bridging loans’’ totaling $500 million to be disbursed and repaid in 1983. Along with the other elements of the package, the availability of these funds became one of the conditions under which the other participants, notably the commercial banks, agreed to provide credits. In the first week of March, 1983, the Bis granted Yugoslavia a six-month credit of $300 million.57 For the remaining $200 million, the Bis required collateral, specifi- cally a pledge of Yugoslavia’s gold reserves. This raised sensitive ques- tions at the highest level in the Yugoslav government. The exact amount and location of Yugoslavia’s gold reserves, as for many countries, was and is aclosely guarded secret (the officially published figure of 1.86 million fine troy ounces®’ cannot be independently verified). The purpose of the gold reserves is literally to assure the continued existence of the federa- Paying the Piper 177 tion; only the gravest need could invoke their use. With some trepidation, therefore, members of the FEc approached the state presidency with the request for permission to pledge gold reserves in security for the Bis loan. After consideration of the serious need to preserve the country’s sol- vency, the permission was granted. Pledging the reserves, however, turned out to be no simple matter. In order to pledge the gold, it had to be determined first that it had not been previously pledged. A search of the National Bank’s records revealed no previous gold pledge. It did reveal, however, a number of undertakings that were highly inconvenient under the circumstances. In obtaining a number of major loans in previous years, Yugoslavia had agreed to so-called pari passu covenants to main- tain the claims of those lenders in at least equal status with other lenders and to ‘‘negative pledges’’ not to encumber any of its assets. In other words it had pledged not to pledge its gold.59 Yugoslavia therefore had to approach the prior lenders to obtain releases from the negative gold pledges it had given in connection with the prior loans before it could pledge gold as security for the sis loan. These lenders included, inter alia, the Chase Manhattan Bank, Citibank, Manufacturer’s Hanover, some European banks (including the Moscow Narodny Bank of London), and the National Bank of Kuwait. Seeking and obtaining release from such pledges for the specific purpose of obtaining a secured sis loan was by no means unheard of, but it was time- consuming. Nevertheless, by August all the commercial banks (including Moscow Narodny) had agreed and only the Kuwaiti pledge was outstand- ing.©° Finally, after a seemingly inexplicable delay, the Kuwaiti bank also signed its release, and in September the second sis loan, this one for $200 million, was completed. Two ironies haunted those who had worked so hard to obtain release from the negative gold pledges. First, it became apparent during the summer of 1983 that the first Bis loan of $300 million had in fact provided enough up-front money to keep essential operations going until other assistance became available. The remaining $200 million was thus not necessary for financial reasons, but it was necessary for technical reasons, because the loan agreement with the commercial bank creditors con- tained the specific precondition that Yugoslavia obtain a $500 million loan from the sis. The second irony lay in the fact that, by the time Yugoslavia was able to pledge its gold to obtain the remaining $200 million, it had repaid the first $300 million and could in effect ‘‘rebor- row” $200 million of that original money without collateral. In any event by December the Bank for International Settlements reported that Yugo- slavia had repaid in full its sis loan(s) for $500 million.®1 178 Yugoslav-American Economic Relations Once Is Not Enough: The 1984 Package From the outset those who were closely involved with Yugoslavia’s effort to surmount its debt crisis were well aware that the dimensions of the problem extended beyond the debt repayments coming due in 1983. As soon as the 1983 program was in place, therefore, the principal partici- pants began to look ahead to 1984. Immediately after the October 1983 meeting of the imr and World Bank in Washington, senior officers of Manufacturers Hanover opened talks with Yugoslav Finance Minister Vlado Klemen¢éi¢, followed soon thereafter by Manufacturers Hanover Trust President Harry Taylor’s visit to Belgrade. mr professionals began to prepare the basis for negotiating a 1984 standby arrangement, and creditor governments began to consider possible ways of coordinating the consolidation (i.e., rescheduling) of Yugoslavia’s 1984 official debt re- payments.®2 Everyone concerned wanted to avoid if possible the difficult and drawn-out dealings that had characterized the 1983 process. On the face of it, the chances for doing so were good. All parties had the benefit of the previous year’s experience, whereas in 1983 they had been plying largely unchartered waters. Foreign lenders were impressed by some marked improvements in the Yugoslav economy’s external performance, which had moved from a $1.6 billion deficit in its current account with hard currency countries in 1982 to a $300 million surplus in 1983. This was accomplished despite a 2.5 percent decline in gross domestic product, indicating a major shift of resources from domestic investment and consumption into exports. (On the dark side inflation did not decline but continued to rise, topping 60 percent for 1983 and giving grounds for concern over the medium and longer term.)®? Based on this record Mut President Taylor told his hosts when he visited Belgrade early in 1984, ‘‘You have earned substantially improved terms over last year.’”’ The task of rescheduling bank debts would be greatly simplified from the previous year, since the huge task of reconcil- ing the amounts owed among the hundreds of banks involved had been completed in 1983. Also it appeared that new financial credits from the bank and government lenders might not be required, apart from normal trade financing, which the banks had agreed to maintain, and official supplier credits. On this latter point the Eximbank set an example for other official export guaranty institutions with an early declaration that all of its programs remained open for Yugoslavia.®# The tasks for 1984 were thus three in number: (1) refinancing of debt Paying the Piper 179 repayments to the commercial banks, (2) refinancing debts coming due to government creditors, and (3) negotiating a new imr standby arrangement, which was still an essential prerequisite for the first two. The commercial banks were quick off the mark. In December of 1983 they agreed to a ninety-day standstill on payments coming due in the first quarter of 1984 to allow time for the negotiation of a rescheduling agree- ment. They also agreed in principle to refinance 100 percent of maturities falling due in 1984, contingent on a comparable refinancing agreement being reached with the government creditors, and a standby arrangement being agreed between Yugoslavia and the imr. These prerequisite agree- ments were concluded in March and April, respectively. After some extended negotiations, mainly over the interest rate to be charged, the final agreement between the icc and the Yugoslav authorities was signed on May 16, 1984.©5 The agreed interest rate was 1°/s percentage points above Lisor (the London Inter-bank Offered Rate—London’s counterpart to New York’s prime rate), down from 17/s in 1983. The maturity and grace periods were one year longer than those agreed in 1983, with the first of seven semiannual installments to become due on April 18, 1988, and the last on April 18, 1991. A total of $1.25 billion in bank debt was resched- uled in 1984. Officials of some of the Bern governments would have preferred to arrange the refinancing of Yugoslavia’s 1984 debt repayments strictly within the framework of the Paris Club. The Yugoslavs, however, were still sensitive to the aura of failure and defeat which in their view surrounded a Paris club rescheduling. The creditor countries respected the seriousness of these Yugoslav concerns, and a compromise was arranged. Two subgroups were established: Group A would deal with the refinancing of maturities due to or guaranteed by governments and Group B would consider whether the governments should pledge new credits for 1984. Group A met in Paris under a French chairman who, as it happened, also chaired the Paris Club. Group B met in Geneva under a Swiss chairman. Both subgroups then reported to the umbrella group in Geneva, which was chaired by the Swiss chairman of Group B. Thus Yugoslavia managed to stay out of the Paris Club. The sixteen countries®® agreed in principle to refinance an estimated $750 million coming due in 1984, with repayment scheduled in six semiannual installments beginning December 31, 1988, and ending June 30, 1991. The governments did not formally pledge new credits, but they did confirm their readiness to carry unused credits from the 1983 package over into 1984, to maintain the existing level of short-term credits, and in 180 Yugoslav-American Economic Relations general (following Eximbank’s example) to remain open to provide new medium-term supplier credits. Supplier credits for 1984 were estimated in the neighborhood of some $700 million.®7 The mr, while recognizing Yugoslavia’s outstanding 1983 perfor- mance in reversing the previous year’s balance of payments deficit on current account, hoped with the 1984 standby arrangement to preserve the improvement in the current account, while reducing or eliminating capital outflows. These outflows had become a problem in 1983, when foreign exchange reserves had fallen by $55 million despite the dramatic improvement in the current account. With new IMF negotiators on the scene, negotiations were again intense although less protracted than they had been in 1983. Both sides again availed themselves of informal consultations with Ambassadors Anderson and Hohl, which they used to increase their understanding of the other’s basic negotiating objectives. The final agreement, approved by the mr on April 18, 1984, provided for $400 million to be made available to Yugoslavia, with drawings contin- gent on more than ten specific performance criteria being met. The most significant of these required a $500 million increase in foreign exchange reserves, increases in domestic interest rates, substantial domestic price increases, the restoration and maintenance of a more realistic dinar exchange rate, and the lifting of a price freeze that had been in effect for several months. All in all, with some $1.25 billion rescheduled by the banks, an estimated $1.4 billion divided roughly between rescheduled and new government credits and the $400 million mmr standby arrangement, the 1984 package of financial support for Yugoslavia could be calculated conservatively at just over $3 billion. In 1983 the Yugoslav authorities had found it difficult and at times embarrassing to maintain publicly that economic policy actions taken by the government were completely independent of the imr Standby Agree- ment that had in fact mandated the actions. In 1984, therefore, they decided to go public with information about the imr’s role in economic policy formation, the negotiation of a standby arrangement, and the fact that the availability of fund resources was linked to negotiated perfor- mance criteria.©8 The further linkage between drawings from the fund and the other elements of the assistance package, from banks and govern- ments, was also made clear. Authorities stressed that the measures mandated by an agreed mr program were fully consistent with what the country had been trying to do in its own stabilization program for the past four to five years. Paying the Piper 181 The IMF under Fire Negative Yugoslav reaction to iwF-mandated austerity increased during the summer, partly because of five straight years of economic restraint. A misunderstanding over one of the numerous performance criteria in the newly agreed imrF program further exacerbated negative perceptions of the fund by the Yugoslav public. In May when Yugoslavia fell into technical noncompliance with a criterion relating to price decontrol, imF staffers over-reacted and held up the drawing of the first tranche under the standby. News of this event reached New York on the eve of the scheduled signing of the bank refinancing agreement, throwing those arrangements into disarray. After ascertaining the cause of holdup, the bankers pro-— ceeded to sign their agreement but delayed its implementation, necessi- tating a second extension of the standstill on repayments to the banks and prompting a wave of jitters among the bankers. The imF reversed itself and declared Yugoslavia eligible for mr drawings,®? but Yugoslav confidence in the country’s partnership with the fund had been shaken. During the summer the mr became a favorite whipping boy for the Yugoslav public, press, and politicians who wished to complain about the country’s economic difficulties.7° Opponents of economic coopera- tion with the West had a field day. While overall economic performance recorded a real upturn in 1984, with exports leading a nearly 5 percent increase in industrial production for a 2.5 percent rise in gross social product, domestic demand and consumption were sluggish. Economic policies were working, in that imported raw materials were being turned into exports at an increased rate without being sidetracked into the domestic economy, but the populace was feeling the pinch. While the press continued to explain in considerable detail just how the mr standby program tied relief from the debt crisis to the implementation of policies of continued economic restraint, several politicians who neither trusted nor fully understood the need for such a program to improve the econ- omy’s efficiency seized on public weariness to blame mr interference for the austerity and to warn of possible public unrest if tight economic conditions continued. Responding to these pressures and encouraged to some extent by foreign economists, bankers, and other observers, Yugoslav authorities began in mid-1984 to consider ways to ease the pressure of annual rescheduling negotiations and the parliamentary struggles to enact the policy measures required by the accompanying mF program. For these reasons plus their desire to introduce more continuity and predictability 182 Yugoslav-American Economic Relations into their economic planning and policy making, they moved toward the idea of a multi-year refinancing arrangement, or MyRA. In November, 1984, the ambassadors of the sixteen Friends of Yugoslavia were sum- moned to a meeting with senior representatives of the ministries of Finance and Foreign Affairs and of the rec, and they were informed that Yugoslavia expected the next round of debt rescheduling negotiations (by this time the word ‘rescheduling’ could be used) to cover a four-year period of payments coming due. Moreover, Yugoslavia would soon expect to move away from IMF standby arrangements and to replace them with more flexible and less formal consultations with the mmr.71 As reported in the press, members of the cabinet had assured a parliamentary committee that if an mF program, complete with “‘letter of intent” were adopted in 1985, it would be for the last time.72 The ambassadors were startled, to say the least. Some of them had also been looking forward to a respite from the annual struggle to reach a rescheduling agreement, but they had foreseen the coming year’s exercise as little more than pro forma, with negotiating procedures settled into a routine and Yugoslav economic performance seemingly headed in the right direction. This new demand for multi-year refinancing would itself be a likely subject for protracted negotiations. Even those Western advi- sors who saw some advantages to be gained from a multi-year arrange- ment’? did not favor abandoning the tmr standby, which provided the aforementioned ‘‘Good Housekeeping seal of approval” with the drawing down of each tranche. Yugoslavia Starts Repaying Principal in 1985 In December of 1984 the International Coordinating Committee (icc) of creditor banks announced that they were willing in principle to consider a four-year rescheduling agreement.7* Thus the new year began with three important questions to be resolved in negotiations between Yugo- slavia and its Friends: Would the sixteen creditor governments emulate the banks and agree to some sort of multi-year arrangement? What would the banks’ myra look like when negotiations were completed? And finally, what role would the International Monetary Fund play in future arrangements concerning Yugoslav debt? The creditor governments seriously considered, but in the end did not grant, Yugoslavia’s request for multi-year refinancing of official debts. Since governments operated on annual budgets, a multi-year commit- ment could have been inconvenient for them. Of greater concern to some, Paying the Piper 183 however,’® was the uneven progress Yugoslavia was making toward re- structuring its economy along market lines; they wanted to evaluate this progress in the context of an annual debt review. Some of the sixteen governments were clearly willing to go along with a multi-year arrange- ment.7® Others gave mixed signals (i.e., afirmative to the Yugoslavs, negative to the United States).?” The United States, reflecting the Depart- ment of the Treasury’s views, opposed. At the Paris meeting of the Yugoslavia Consolidation Group in March,7® a compromise of sorts emerged in the form of a ‘“‘super goodwill clause,” which undertook to consider a Yugoslav request for rescheduling favorably in the coming years, assuming Yugoslavia’s international financial affairs remained in order in the interim. Included in the Paris agreement was a refinancing of 90 percent of debt principal payments coming due in the fifteen months between Jan- uary 1, 1985, and May 15, 1986, conditioned on a 1985 Standby Agree- ment with the mr. Repayments of the remaining 10 percent of principal amounted to over $500 million in 1985 and over $200 million in 1986. These payments placed Yugoslavia virtually in a class by itself among debt-plagued countries; having made all of its interest payments through- out the debt crisis, it now began to retire the principal. One can question whether this was the wisest policy under the circumstances, but it gave strong evidence, as it was intended to do, of Yugoslavia’s good faith and firm intention to meet its international financial commitments. What Does a MYRA Look Like? Negotiations with the banks did not go quickly, as they might have been expected to do once the banks had declared their willingness to engage in multi-year refinancing. On the contrary, it took until the end of August to reach agreement in principle, and the agreement itself was not signed until December, 1985, a full year after the banks’ original declaration. It turned out that the Yugoslav and bank negotiators held quite different concepts of what a Myra (multi-year refinancing arrangement) should be. The Yugoslavs wanted an agreement that would consolidate all payments coming due over several years into a single package to be repaid over several future years. Under such an agreement any conditionality or criteria to be met in order for the agreement to take effect would be applied only once, at the outset of the agreement. The banks, on the other hand, had in mind a serial rescheduling under which payments would be rescheduled one period at 184 Yugoslav-American Economic Relations a time, with performance of certain conditions in each period triggering the rescheduling of payments due in the next. Negotiations thus focused on the Yugoslav request for a four-year consolidation period versus the banks’ offer of a “‘one-plus-one-plus-one- plus-one,” and, if there were to be a serial rescheduling as the banks proposed, what triggers would initiate the subsequent stage(s) of the arrangement. Eventually agreement was reached on a “‘two-plus-two” formula, under which there would be two successive two-year consolida- tion periods with the second taking effect as long as Yugoslavia achieved a certain amount of growth in its foreign exchange reserves and increased its exports (measured as a percentage share) to certain Western markets. Yugoslavia also requested and received a lowering of the interest rate charged, to 1/s points over Lipor from the previous 1°/s.72 The complexity of the document drafted to reflect these provisions and the Yugoslavs’ need to study it thoroughly accounted in large part for the further delay before the agreement was signed in December. In order for Yugoslavia to draw its last available financial tranche from the imF (as well as to meet the conditions of its agreements with the bank and government creditors), it was necessary to negotiate a standby arrangement with the mr for 1985. From the mmr’s standpoint, the objec- tives of such a program were to continue the improvements being made in the balance of payments (both current and capital account) with hard currency countries, while encouraging modest expansion of the domestic economy. Agreement was reached on a program that provided for “‘posi- tive’’ domestic interest rates when measured against inflation and for continuing devaluation of the dinar against selected foreign currencies to adjust for Yugoslavia’s high rate of inflation. It also continued the man- date for fiscal restraint and avoidance of administrative price controls. As in former years U.S. government export credit facilities— Eximbank, Foreign Credit Insurance Association (Fc1A) and the Commod- ity Credit Corporation—remained open to finance U.S. exports to Yugo- slavia. In addition, pursuant to the government creditors’ agreement in Paris, Ambassador Anderson and Eximbank officials agreed in May on behalf of all U.S. official creditors to reschedule 90 percent of all principal payments coming due between January 1, 1985, and May 15, 1986. The agreement was managed on the Yugoslav side by Jugobanka; ten other Yugoslav banks were co-obligors.89 The rescheduled principal amounts were to be repaid in ten semiannual installments beginning March 1, 1990, and ending September 1, 1994. The interest rate to be charged was computed on the basis of the cost of money to Eximbank plus 1 percent. Paying the Piper 185 The Yugoslavs strongly requested lower rates, arguing that the U.S. charges were higher than those of the other creditor governments, but Eximbank was not able to yield on this point. Uncertainties in 1986: “Enchanced Monitoring” The year 1986 began clouded by several uncertainties. New foreign exchange, foreign trade, and banking laws passed by the Federal Assem- bly at the end of 1985 had altered basic features of Yugoslavia’s foreign trade system and, some argued, weakened the incentive to export. Two events due to take place in May, the expiration of the mmr standby arrangement and the end of Prime Minister Milka Planinc’s term of office, to be replaced by a new cabinet headed by Branko Mikulié of Sarajevo, also raised questions over the degree of discipline that the new govern- ment would maintain over the economy. To replace the expiring mr Standby arrangement, a new agreement was reached with the fund that took effect on May 15. It called for so- called enhanced monitoring of Yugoslavia’s economic policies in con- junction with Yugoslavia’s consultations pursuant to mr Article IV. The policy guidelines were agreed with the mmr staff and provided, as before, for a policy of monetary restraint and limitation of domestic income growth, maintenance of positive real interest rates (i.e., higher than the inflation rate), and maintenance of an active exchange rate policy to reflect Yugoslavia’s inflation in the dinar value of foreign currencies. The main difference from a standby arrangement was that since Yugoslavia was no longer drawing funds from the mr, the question of its eligibility for such drawings did not arise. Instead the imr was to provide periodic reports on Yugoslavia’s achievement of its policy targets. The banks had agreed in 1985 to the rescheduling of 1986 maturities. For 1986, therefore, it only remained for the creditor governments meet- ing in Paris under the provisions of a super-goodwill clause to agree on the rescheduling of offical debt. In April the Yugoslavia Consolidation Group (by now the Paris Club in all but name) agreed to refinance 85 percent of principal payments coming due between May 16, 1986, and May 15, 1987, with a grace period of four years and a maturity of eight and a half years. This meant that Yugoslav creditors would be repaying 15 percent of maturing principal payments as they came due, up from 10 percent the previous year. This was in keeping with the past practice of the Paris Club that required debtor countries to repay on schedule increasing percentages of principal with each subsequent year’s re- 186 Yugoslav-American Economic Relations scheduling. It also distinguished Yugoslavia’s performance even more sharply from that of other debtor countries. With a nod to Yugoslavia’s continuing request for multi-year refinancing, the Consolidation Group also agreed to refinance on similar terms in 1987 a smaller percentage of principal coming due between May 16, 1987, and March 31, 1988, leaving open the exact percentage of these payments to be refinanced. As to amounts coming due in the last three quarters of 1988, the governments expressed their willingness to remain involved in the process of medium- term adjustment provided certain conditions were met. As it happened some of the early concerns about economic perfor- mance in 1986 proved well founded. A surge in personal income in the second half of 1985 continued through 1986, and inflation, unchecked by effective monetary constraints, accelerated faster than interest rate adjust- ments and dinar devaluations. Bank creditors, nervous about possible weakening of economic discipline in the absence of an mmF standby arrangement, began to let their short-term credit lines run down when their obligation to maintain them at the 1983 level 81 expired. An ivr staff report at the end of 1986 noted that some of the agreed targets had been missed. With the government debt consolidation group due to meet in April, 1987, a special mr mission traveled to Belgrade and prepared a supplemental report. At the request of the group, the Yugoslav authorities prepared a letter of assurance that policy shortcomings were being remedied. At the insistence of the United States delegate in Paris, another Yugoslav letter was requested and supplied. The new Yugoslav finance minister, Svetozar Rikanovi¢, made an extensive presentation to the Paris meeting. He described in some detail the measures his government was taking in order to make Yugoslav businesses more responsive to the forces of the marketplace.®? Still the consolidation group did not act in April but postponed action until the next meeting of the Paris Club in June. In May the banks had to decide whether the triggers had been met to activate the second, semiautomatic phase of their two-plus-two re- scheduling agreement. Relying strongly on Yugoslavia’s impressive re- payment record, the banks decided to go ahead, hoping they would soon be joined by the governments. Meanwhile the creditor governments pondered the creditors’ dilemma for nearly two months. If they denied rescheduling because the preconditions had not been met, they would throw the country into default, but if they rescheduled they risked rendering the agreement meaningless and undercutting the economic discipline necessary to achieve fundamental changes the Yugoslav econ- omy required. Meeting in Paris in June 1987, they finally agreed to Paying the Piper 187 reschedule 84 percent (one percentage point less than the previous year) of the maturities coming due between May 1, 1987, and March 30, 1988. For the third straight year, Yugoslavia had increased its commitment to repay part of the principal outstanding in its international debt. The wisdom of this course of action was increasingly open to question, however. Despite a substantially improved trade account,. Yugoslavia appeared short of cash or ready credit to meet its upcoming payments. Part of this shortage (which reminded some observers of the shortages in the spring of 1982) was due to the banks running down their short-term credit lines. Part also, however, might be traced to the ambitious repay- ment schedule agreed with the Yugoslavia Consolidation Group (the Friends of Yugoslavia). In 1985, 1986, and 1987, Yugoslavia had under- taken to repay to government creditors 10 percent, 15 percent, and 16 percent, respectively, of principal payments coming due in those years. Arguably these repayments, totaling nearly $1 billion, could have been put to better use in stimulating the Yugoslav economy to achieve greater growth and export capacity. This, the argument ran, would not only have contributed to greater economic strength over the medium and longer term but would also have put Yugoslavia in a stronger position to meet the obligations soon to come due under the rescheduling agreement of 1983. In fact, just weeks after the government debt repayments were re- scheduled in June, Yugoslavia was looking for funds to make the first payments due under the 1983 agreement with the banks. It applied to the Bis for a bridging loan, but the Bis was not persuaded that anticipated receipts from the 1987 tourist season comprised a sufficiently firm prospect to “‘bridge to.”’ It then applied to the icc of the Western banks for a rescheduling of the first principal payment due the banks, in the amount of some $240 million. In the absence of a standby arrangement with the IMF, however, the bankers did not agree to this proposed rescheduling of already rescheduled debt. In the fall of 1987, Yugoslavia suspended payments to creditors, resulting in a tacit standstill, and began serious negotiations with the mmr that resulted in agreement on a standby arrange- ment. The terms of the arrangement, hammered out in negotiations during the first quarter of 1988, included budget reductions and limits on incomes and credit aimed at bringing inflation under 100 percent for 1988. Domestic interest rates were to be positive in real terms (i.e., greater than the rate of inflation), and an active dinar exchange rate was to maintain the value of foreign exchange taking dinar inflation into ac- count. Other provisions called for price, import, and foreign exchange liberalization. Legislation aimed at implementing Yugoslavia’s side of 188 Yugoslav-American Economic Relations the agreement was passed by the Yugoslav Federal Assembly in April, and the iw ratified the standby arrangement in May of 1988. Under the standby the mr was to lend $430 million in several tranches. The World Bank negotiated a $100 million Structural Adjust- ment Loan (sAL), government creditors committed $500 million and the commercial banks $300 million, for a total of over $1.3 billion in new credits to meet Yugoslavia’s estimated debt repayment gap for 1988. The governments agreed in June to reschedule 100 percent of the debt pay- ments (principal and interest) coming due in a one-year period with six years of grace and a four-year repayment, for a total “‘tenor’’ of ten years. The banks in September made an agreement to restructure the $7 billion owed to them (out of the total $19 billion in hard currency owed by Yugoslavia to Western creditors) over an eighteen-year period, with a six- year grace period during which there would be payments of interest only at 15/16 of a percentage point over Lisor. Conditions on the agreement included fulfillment of the mmr performance criteria and the maintenance of a free market for foreign exchange and prescribed levels of reserves. Yugoslavia’s economic performance was mixed in 1988. Inflation exceeded 250 percent, more than doubling targeted rates, while social product, industrial production (down 1 percent), and agricultural output (down 3.3 percent, hindered by severe drought) all declined. The external sector continued to improve, however. Yugoslavia registered a $1 billion surplus in its balance of payments on current account with hard-currency countries, while exports of $9.6 billion (up 11.9 percent from 1987) and imports of $10.4 billion (up 3.4 percent) shrank the hard-currency trade deficit to $800 million. Tourism led invisibles (services) to a $2.8 billion surplus, which supported an increase in foreign exchange reserves to $1.3 billion by the end of 1988. Political tensions rose sharply in the last months of 1988 and contin- ued to increase during 1989. While these problems in part reflected economic difficulties, they also greatly complicated efforts to deal with them. The Mikuli¢ government resigned in December 1988, ostensibly because of economic issues. Prime Minister Ante Markovié and his cabinet took office in January, 1989, committed to honoring Yugoslavia’s obligations abroad and carrying out a domestic program of reform toward economic effectiveness and political democracy.®* As in the previous year, economic results were sharply mixed in 1989. Yugoslav exports continued to increase, particularly to convertible currency markets, the tourist season was successful and remittances from abroad were strong, to create a current account surplus of more than $2 billion and boost foreign Paying the Piper 189 exchange reserves over $4 billion by the end of September. An agreement reached in May to refinance $7.2 billion of commercial bank debt on a long-term basis reflected substantial debt reduction through a variety of debt-swap arrangements. According to the mmr, Yugoslavia’s debt service ratio in 1989 was by far the lowest of the world’s 15 most heavily in- debted countries.84 On the other hand, the domestic economy: continued to deteriorate as reform efforts fell short of dealing with its imbalances. Real personal incomes continued to decline, unemployment passed 20 percent, and inflation soared into four digits. Negotiations with the mmr focussed on stabilization and reform measures. Ratification of a standby arrangement was still pending at the end of 1989, as was Yugoslavia’s request for formal rescheduling of official foreign debts in the Paris Club. We shall comment further on Yugoslavia’s efforts at economic reform and the obstacles confronting these efforts in our concluding chapter. As the decade of the 1980s ended, it was possible to assess in very broad terms the results of the international efforts to provide financial support for Yugoslavia that had begun so tentatively in 1982. Formal default and bankruptcy had been avoided. Western governments, West- ern banks, and international financial institutions had rallied to support Yugoslavia’s continued economic viability and independence. Yugo- slavia had achieved a dramatic improvement in its external economic position and had committed itself to a thoroughgoing reform of its domestic economic institutions. Progress toward that goal remained elu- sive, however. Improved international trade and balance-of-payments positions only partially reflected domestic efficiency; for the most part they were gained at the cost of a decade of nearly unremitting austerity for Yugoslavia’s working people, with more of the same to look forward to if planned reforms were to be fully carried out. Conclusion: Crisis, Reform, and Yugoslav-American Relations amen (0 reviewing Yugoslav-American economic relations since World War II, we have seen Yugoslavia forced to deal repeatedly with political and economic crises that have threatened its independence, its unity, and its political and economic viability. The creation of a unique economic system at a time when the country itself was under extreme external pressure was followed by a period of growth that for a time brought its people a markedly improved standard of living. Repeated attempts at economic reform have sought to develop an effective, self- sustaining model of a socialist market economy but have not succeeded. During this period Yugoslav-American economic relations have pro- ceeded pragmatically and constructively for the most part, responding more to crises facing Yugoslavia or to political pressures in the U.S. Congress than to long-term planning on either side. After the immediate postwar period of confrontation and suspicion, these dealings passed through stages of U.S. emergency relief and official economic assistance to a primarily commercial relationship since the mid-1960s, featuring trade, investment, and financial transactions between independent enti- ties on both sides. At the beginning of the twentieth century’s final decade, Yugoslavia finds itself in deep economic and political crisis. Its government is struggling to implement an economic reform program of unprecedented scope, in an effort to create an effectively functioning market economy that has eluded previous reforms. Political conflicts and ethnic tensions in Yugoslavia ten years after President Tito’s death complicate reform efforts and threaten to undo the cohesion that held the country together while he was alive. Tumultuous events in Eastern Europe and the Soviet Conclusion 191 Union have drastically altered both the setting in which Yugoslavia pursues its economic objectives and the context of Yugoslav-American economic relations, as Yugoslavia’s neighbors to the east turn away from communism and seek to reform their own economies on market princi- ples. Meanwhile, the perceived Soviet military threat to Western Europe diminishes, perhaps irreversibly. : In this final chapter we assess the economic relationship between Yugoslavia and the United States in the context of these developments. How does Yugoslavia’s current economic crisis, for example, reflect on the value of its economic relations with the United States? What lessons do past and current Yugoslav efforts at economic reform and their American connection hold for similar efforts in Eastern Europe and the Soviet Union? And finally, given that Yugoslav-American economic relations have been premised for more than four decades on an essen- tially bipolar world and a perceived Soviet military threat, what changes can be expected in the relationship if that premise no longer holds? The Yugoslav Economy in Crisis, 1988—1 989 — The Yugoslav economy, with its unique system of workers’ self- management, has encountered serious and persistent problems in the years since World War II. Some of these problems, such as recurring deficits in the international balance of payments, domestic inflation, and lagging productivity, have been common to many economies, partic- ularly developing ones, although they have been made more acute by Yugoslavia’s special circumstances. Others, relating to domestic credit arrangements, efficiency of enterprises, and incentives for workers, ap- pear to have arisen specifically from unique aspects of the Yugoslav system. Attempts to surmount these problems, sometimes under crisis conditions, have given rise to repeated efforts at economic reform. Com- petition in the world marketplace has provided standards and goals for these reforms; American and other Western businesses have provided models for change. Unfortunately, neither Yugoslavia’s major economic reforms of the mid-1960s nor those of the mid-1980s were carried through to success- ful conclusion. The 1980s ended with the Yugoslav economy in crisis following a disappointing performance over the decade. The production of goods and services (Gross Social Product) had stagnated, and real per capita consumption and investment had both fallen by an average of 7 to 8 percent annually since 1979.1 Rapidly accelerating inflation exceeded 192 Yugoslav-American Economic Relations 250 percent in 1988 and soared into four digits in 1989. Unemployment passed 20 percent, with further increases in prospect if reform-based market strictures forced inefficient enterprises out of business. Because previous attempts at reform failed to introduce effective market discipline, too many enterprises remain inefficient and over- staffed. The entry of new, more competitive firms is difficult. The unity of the national market has been impaired by excessive regionalism, and the mobility of labor and capital has been restricted. A patchwork of regional price controls has further distorted the market mechanism by stifling legitimate profits, and informal inter-enterprise and bank credits have undercut monetary discipline. With such major systemic problems per- sisting in the Yugoslav economy after more than four decades of relations with the United States, we must ask whether these relations have in fact been beneficial for Yugoslavia. Let us examine this issue directly. Assessing American Involvement —We have argued in the preceding chapters that Yugoslavia’s expo- sure to the market economies of the West, and to that of the United States in particular, has had a positive influence on Yugoslav economic devel- opment. We have traced this influence from early emergency assistance that helped avert famine and assure Yugoslav independence through subsequent credits and commercial relations that have supported indus- trial and commercial growth and have encouraged greater involvement in the world economy. Yet it could be asked in retrospect whether this American assistance and involvement have been altogether beneficial. Or did the provision of food relief, for example, and then agricultural products on soft terms under PL 480, aid of the sort now proferred to Poland, merely allow Yugoslavia to delay essential investments in agriculture and restrict the size and mechanization of its private peasant farms? Did subsequent balance-of-payments relief provide support for uneconomical concentra- tion of investment in heavy industry? Should U.S. trade and economic assistance have been used as levers to persuade the Yugoslav authorities to pursue a better-balanced or more market-oriented program of develop- ment? Did later private American involvement in specific investment projects, such as Dow’s joint venture with 1Na or the readiness of Western and particularly American banks to take part in the excessive interna- tional borrowing and lending of the 1970s contribute to Yugoslavia’s economic difficulties? Conclusion 193 Yugoslavia’s Independence Maintained The question of attempting to use bilateral economic relations to press for changes in Yugoslav policy is perhaps most easily dealt with. Yugoslavia has always guarded its independence jealously, and Tito’s Yugoslavia of the 1950s was never prepared to accept any policy ‘“‘strings”’ attached to American trade or assistance. This position was made explicit when President Tito declined further U.S. aid in 1961 after President Kennedy had called for a review of U.S. assistance to Yugoslavia. For the most part the American influence available to be wielded was not great in any case; chapters 2 and 3 make clear the overall limitations of U.S. aid after the peak year of 1953. Chapter 4 reveals the generally small size of U.S. trade in relation to the Yugoslav economy (see Tables 2.1, 2.2, and 4.8). On the other hand, at those junctures when American assistance might have been critical to Yugoslavia’s viability, its denial would have thwarted precisely those aims the United States shared with Yugoslavia. The special economic relations of the 1950s did “‘keep Tito afloat’’ and outside the Soviet bloc, a matter of strategic importance both in the American competition with the Soviet Union and in Yugoslavia’s own struggle to preserve its national independence. At the same time the Yugoslav experience provided an important demonstration to the other countries of Eastern Europe that a peaceful and constructive relationship with the West was possible without sacrifice of principle or national independence. The significance of these achievements can hardly be overestimated. Their legacy can be seen in the long-standing Soviet acceptance of Yugoslav independence, a precursor of the Soviet ability also to accept the independence asserted by the other East European countries at the end of 1989. Positive Results from Modest Amounts of Aid and Trade On the economic side Yugoslavia’s relationship with the United States has certainly yielded benefits. The Yugoslav negotiations with the U.S. Development Loan Fund in the 1950s not only gained support for several prudent investment projects at the time but also prepared Yugoslav authorities for many subsequent effective negotiations with the World Bank and the International Monetary Fund. Sales financed under Ex- imbank (see Table 5.1), Commodity Credit Corporation, and parallel programs often picked up where arp and PL 480 sales left off in providing American equipment, expertise, and supplies for Yugoslav industry and 194 Yugoslav-American Economic Relations agriculture. As an exporter to the United States, Yugoslavia was among the first developing countries accorded tariff preferences (Gsp) under the U.S. Trade Act of 1974. In the mid-1980s roughly half of i exports to the United States entered the country under csp. Private American enterprises and their Yugoslav trading partners have been resourceful in seeking out mutually advantageous trade in equipment whose sale has facilitated modernization and earned hard currency for the Yugoslav economy. The pioneering countertrade ar- rangements of McDonnell-Douglas, which joined with the Belgrade trad- ing enterprise Inex to achieve the profitable sale of commercial air- craft to Yugoslav Airlines (jaT) by marketing a variety of Yugoslav products inthe United States and elsewhere, are a good example. Imagina- tive arrangements by other Yugoslav trading enterprises such as Genex, Progres, and Jugoexport brought the products of other major American companies—including Boeing, Westinghouse, and many others—into Yugoslavia and introduced Yugoslav manufacturers to the American market. Incomplete Reforms in the 1960s and Debt Crisis in the 1980s In 1965 increasing contact with market economies as well as discontent with the inefficiencies of their own system led Yugoslav authorities and economists to announce a major reform of the economic structure, espe- cially its industrial sector, along market lines. In so doing they took the American and other market-based Western economies as both their standards for comparison and their models for changing the environment and behavior of business enterprises. The 1965 reform legislation sought to improve the efficiency of enterprises by leaving them a larger share of profit and forcing them to abide by competitive rules of the marketplace in conducting their operations. In 1967 follow-up legislation permitted foreign private investment in joint ventures with Yugoslav enterprises. Yugoslav authorities hoped by encouraging foreign investment to obtain infusions of capital, technology, and managerial knowhow that would improve the efficiency of their enterprises and strengthen the operation of market forces in their economy. Unfortunately, the reforms of the 1960s fell short of their objectives. The forces of the marketplace remained weak as inefficient enterprises were allowed to escape the penalties for failure and the rewards for success were diluted. The foreign investment laws promulgated in 1967 and subsequently amended also fell short of expectations. Although joint Conclusion 195 ventures contributed to the upgrading of practices in a number of branches of Yugoslav industry, the general assessment both within and outside Yugoslavia after two decades of experience was that major im- provements in legislation were required. During the 1970s Yugoslavia, along with many other developing countries, turned to American and West European banks for the appar- ently easy credits that surplus petrodollars were providing, and the banks were all too ready to supply the funds. This undisciplined borrowing and lending came to an abrupt end in 1982, with Yugoslavia’s total interna- tional debt near $20 billion (a level since reached by Hungary). As short-term international lending began to dry up, Yugoslavia’s foreign exchange reserves fell and the specter of default, with unforeseeable political as well as economic consequences, became very real. While American banks had taken some part in creating this problem, Americans also had much to do with its resolution. The U.S. government took a leading role, together with the wr and several leading American bankers, in assembling the several billion dollars of debt rescheduling and new lending that was needed to avoid the ‘“‘black option’”’ of default. This huge package, to which some sixteen Western governments as Friends of Yugoslavia and literally hundreds of commercial banks con- tributed, was tied to the economic policy and performance conditions of a standby arrangement negotiated with the tur. The rescheduling effort, with attendant mr conditionality based in part on Yugoslavia’s own stabilization program, was repeated in subsequent years. Default was avoided and external accounts improved dramatically. Unfortunately, the restrictive measures implemented through 1985 as part of successive IMF programs were not successful in curbing infla- tion, nor did they succeed in enforcing increased efficiency. Relaxation of restraints and departure from an ImrF standby arrangement by the Mikuli¢ government in 1986 and 1987 did not help matters, and a new standby was negotiated in 1988. External accounts continued to improve (in contrast to contemporary Hungarian and Polish performance), but 1989 found the domestic economy in the crisis conditions described at the beginning of this chapter. Foreign commercial bank debt was rescheduled in May of 1989. Paris Club rescheduling of official debt was tied to the ratification of another mr standby arrangement, and by year’s end an agreement had been initialed that incorporated several of the reform measures described below, with special emphasis on drastic steps to cut inflation to a target rate of 13 percent in 1990 from a figure fully 100 times higher in 1989. 196 Yugoslav-American Economic Relations Toward a Mixed Economy in the 1990s —On the eve of taking office early in 1989, Prime Minister Ante Markovic¢ promised to carry out a thorough, market-based overhaul of the Yugoslav economy. In his speech to the Federal Assembly on January 16, 1989, Markovié called for (1) competition between various forms of business, whether socially or privately owned; (2) integrated markets for the exchange of goods, capital, and labor throughout Yugoslavia; (3) market determination of prices, business success or failure, and the rewards for labor; and (4) further integration of the Yugoslav economy into the world economy, with a key role to be played by foreign invest- ment. At the conclusion of this address, he called for a long-term process of economic reform and political democracy.2 The Federal Assembly responded by voting Markovié and his cabinet into office with no dissent- ing votes and only a handful of abstentions. The federal constitution was amended and the most far-reaching legislation on business enterprises and foreign investment to date was passed in the last months of 1988. These changes, like the original joint venture legislation in 1967, were enacted following numerous formal and informal meetings with American and other Western business represen- tatives to determine what provisions would be most likely to attract foreign investment. They allowed foreign investors for the first time to acquire ownership (as opposed to previously allowed contractual rights) up to 100 percent in any of the various forms of business organizations, including private entrepreneurships, partnerships, cooperatives, limited liability firms, and joint stock companies. Constitutional amendments were required to make this change, legitimizing all of the named forms of “ownership of the means of production, with equal treatment of all forms,’’ thus encouraging foreign as well as domestic entrepreneurs and investors to compete freely in virtually every form of business organiza- tion.$ Building on these beginnings the new government submitted a pack- age of economic measures addressing a broad range of issues to the Federal Assembly in early summer 1989, and by October several impor- tant steps had been taken, with more in prospect. Prices were deregu- lated on 80 percent of goods traded (with exceptions for power, postal, telephone and telegraph services, railway traffic, metals, and medicines). Import licensing requirements were removed from 87 percent of imports, and tariffs were reduced to an average of 7 percent.® Conclusion 197 Dinar Becomes Convertible, Enterprises May Become Private Several significant pieces of legislation were passed to take effect January 1, 1990. One, fulfilling a goal that had been eluding attainment since the 1960s, provided for the issuance of a new, convertible dinar, to equal 10,000 of the former dinars (called “‘new dinars”’ since their creation in 1965). For many Yugoslavs who still calculated in terms of ‘‘old’’ pre- 1965 dinars, the conversion ratio was one million to one. In order to halt the inflation-accelerating impact of devaluation, the rate of exchange was to be pegged for the first six months of 1990 at 7 dinars to the West German mark, 12 to the U.S. dollar. An accompanying foreign exchange law allowed citizens freely to purchase foreign exchange for dinars and provided for interest on bank deposits denominated in a foreign currency to be paid in that currency. Prime Minister Markovic proudly observed that Yugoslavia was thus becoming the first socialist country to have a convertible currency, ‘‘a token of its maturity and readiness to join the world of developed societies.’’® Another law provided for the privatization of socially owned enter- prises, if their workers so decided, by the sale of shares in the firms to any foreign or domestic firms or individuals. With this act social ownership in Yugoslavia became in effect a voluntary matter. Yet another law gave important new teeth to bankruptcy procedures by allowing creditors and debtors as well as government authorities to initiate bankruptcy proceed- ings. A law reorganizing the banking system also took effect on January 1, 1990, enforcing stringent minimum requirements for banks (capital, total assets) and putting banking on a share-issuing, limited-liability, profit/ loss basis, with foreign investment permitted and expected. Banks unable to meet the minimum criteria could become branches of other, larger banks. The system of associated or ‘‘united”’ banks, together with their constituent or “‘basic’”’ banks, was thus replaced, with the basic banks having the option of going independent if they met the minimum criteria or of becoming branches of the former ‘‘united”’ banks if they did not. Most united banks expected the latter to take place, except in Croatia, where the basic banks had a more independent tradition. Giving banks greater independence and responsibility was expected to reduce bad loans, forcing banks to evaluate them from the standpoint of profitability, and to reduce local business or political pressure on the banks to lend to failing enterprises.” Several enterprises began issuing securities in the latter half of 1989 198 Yugoslav-American Economic Relations on the basis of special authority granted while general authorizing legisla- tion was being prepared. Some of these securities were made redeemable in services or in foreign exchange in order to avoid being devalued by inflation, and stock exchanges were set up in some of the republic capitals. Debt swaps were authorized in 1989 and reduced Yugoslavia’s foreign debt by about $1 billion. While most swaps were for products or services, the first investment swap, the kind most favored by the Yugoslav authorities, was arranged by the First National Bank of Chicago together with Beogradska Banka to build a Hyatt Hotel in New Belgrade. Other legislation proposed in December 1989 included tax reform legislation to establish a turnover tax as a source of revenue for federal programs. A tough anti-inflation law was passed freezing wages for six months, with further increases linked to percentage increases in the exchange rate of the West German mark.® Following the laws passed at the end of 1989 and the beginning of 1990, the Markovic government put forward an impressive package of further constitutional amendments and legislation that would give fed- eral bodies of government greater authority to implement national eco- nomic policy, thereby restoring much of the power that was divested from federal authorities by the 1974 Constitution. The package included mea- sures that would further rationalize the tax system, broaden the federal budget to include previously hidden subsidies, which would then be reduced or eliminated, and give the National Bank greater independence as well as new power to implement monetary policy, oversee and enforce the reorganization of the banking system, and thereafter ensure deposits. A law on labor relations would make it possible to lay off surplus labor, and another measure would establish a $150 million-equivalent fund to ease the social impact of resulting unemployment.? The sum of these measures and others comprising the government’s 1989/90 program reflected many lessons gained from Yugoslavia’s long experience with attempts to restructure its economy, as well as several insights from American advisers it retained for the purpose.?° If fully and effectively implemented, it promised to strike much deeper to the heart of the problems of inflation and inefficiency than any previous Yugoslav reform efforts and to bring about fundamental changes in the working of the economy. The Need for Political Consensus The difficulties of implementing this comprehensive program were ap- parent. Substantial economic resources would be required, as would Conclusion 199 considerable technical skills at implementation. But perhaps most daunt- ing was the need for political consensus and a broadly shared determina- tion to undertake and persist in measures that appeared certain to raise unemployment, reduce standards of living already depressed by a decade of austerity, and increase income disparities among regions and ethnic groups where tensions and mutual distrust had been rising for some time. A sense of political crisis had prevailed in Yugoslavia for more than a year, and old antagonisms were coming to the surface following Serbian- encouraged use of federal force under complex and volatile circum- stances in the province of Kosovo, which is also part of the Republic of Serbia, where the majority population of ethnic Albanians had been pressing the Serbian minority to leave the area. Slovenians, Croatians, and others who professed to fear a resurgence of the Serbian domination that for them had characterized pre-World War II Yugoslavia strongly criticized Serbia’s actions in the Kosovo, drawing a sharp Serbian re- sponse. When Slovenian authorities blocked a move by Serbian demon- strators to bring their case to the Slovenian capital, Serbian leaders called for an economic boycott of Slovenian goods. Such revival of regional and ethnic animosities could undermine the political will necessary to achieve the systemic changes required in the Yugoslav economy. Failure would be ironic as well as unfortunate, given the evident common ground between the Markovic government and the Serbian authorities on the subject of economic and political reform. This can be seen in a report of the Serbian presidency’s Commission for Social Reform issued in July, 1989, which called for the creation of a unified Yugoslav market, without ‘‘republican, provincial, or commercial isola- tionism.’’!1 Other steps called for in the report included: 1. Full independence and economic accountability of business en- terprises 2. Separation of the workers’ self-management process from busi- ness functions 3. Cessation of party interference in business affairs 4. Political pluralism, including elimination of Communist monop- oly on political activity 5. Guaranteed freedom of speech and the elimination of ‘‘verbal offense’’ against the state 6. Direct election of representatives and the taking of most govern- ment decisions on a majority, rather than consensus, basis. The general principles outlined in the report were at least consistent with the aims of the Markovié government, both in the substance of their appeals for economic reform and political democracy and in their call for 200 Yugoslav-American Economic Relations procedural changes (i.e., decisions taken on a majority rather than con- sensus [unanimity] basis, which would make passage of crucial measures less difficult). Agreement to this extent between the government and elements of perhaps its greatest potential opposition gave some reason to hope for eventual success. Lessons from Yugoslav Experience —As we have seen Yugoslavia had been striving to implement economic and some political reforms for two and a half decades by the end of the 1980s. By 1990 rapid changes were taking place in the Soviet Union and Eastern Europe. Soviet President Gorbachev’s policy of glasnost led to a more openly elected parliament debating issues of economic restructuring, or perestroika, in the Soviet Union. Elected representatives of Solidarity took power in Poland, and their finance minister put forward an uncompromising program for market-based solutions to that country’s economic problems. Hungary, Czecho- slovakia, East Germany, Bulgaria, and even Romania deposed their Com- munist leaderships. By mid-January 1990 all of the Soviet Union’s former satellites had abolished their Communist parties’ formal monop- oly of power, and in February the Soviet Union itself followed suit. Most of the countries were committed to creating market economies with greatly expanded private sectors, and all were seeking some form of en- hanced financial, trade, or investment relations with the West. What bear- ing did Yugoslavia’s decades-long efforts at economic reform have on these events? Measures enacted in Yugoslavia within the previous year had in fact advanced the economic reform process further than it had previously gone there or, arguably, anywhere in Eastern Europe. Self-managed enterprises had after all been launched and the apparatus of central planning abolished in Yugoslavia by 1953. By 1965 a program of market- oriented reforms was articulated that corresponded in all respects, save private ownership, to the pronouncements lately issuing from the new East European regimes. By 1990 provisions were in place in Yugo- slavia for the establishment of a convertible dinar, the privatization of socially owned enterprises, and other dramatic changes. It seemed evi- dent, therefore, that some of the lessons from Yugoslavia’s experience might be valuable for other countries as well as for its own further reforms. Yugoslavia had learned in the 1970s, for example, that political Conclusion 201 decentralization does not necessarily serve the cause of economic effi- ciency. On the contrary the 1974 Constitution’s dispersal of authority from the federation to the republics and provinces, while responsive to reactions in some parts of the country against concentrations of power in the capital, seriously undercut the federation’s ability to implement effective macroeconomic policies. While the decentralization was also intended to reduce high-level government meddling in business deci- sions, it in fact had the perverse effect of increasing government meddling at the lower levels. Even Yugoslavia’s pioneering experiment with foreign investment legislation, which began in 1967, showed that ideological considerations could have a chilling effect on actual business activity. Attempts to square the circle with legislation that legalized foreign capital invest- ment in Yugoslav industry while trying to maintain the integrity of Yugoslavia’s system of social ownership and workers’ self-management offered the investors limited contractual rights rather than ownership. This fell short of providing the control over operations that many major investors required, while the unfamiliar terminology and accounting procedures made many of them uneasy. Consequently, most foreign investments in Yugoslav joint ventures involved relatively small opera- tions that did not bring with them the capital, technical, and managerial skills or long-term commitment to the venture’s success that the Yugoslav authorities were seeking. Yugoslav efforts to shield workers from the impact of reforms by protecting their enterprises from the penalties of failure were revealed to be essentially self-defeating. Easy credit, subsidies, ‘‘pooled’”’ resources, or mergers to rescue failing firms were often justified on the grounds of protecting the workers, but they robbed the managers (‘‘worker’’ or otherwise) of their sharpest incentive toward efficiency—the fear of bankruptcy. A major lesson Yugoslavia learned from its long experience was that the actions required to move from an administered economy to one motivated and governed primarily by market forces are many and diffi- cult. Even where, as in Yugoslavia, some elements of competition existed in the form of independent enterprises, much more was required than a simple policy declaration in favor of competition. Establishing market- based prices, to take only one example, required the removal of controls, subjecting domestic producers to the rigors of foreign as well as domestic competition and enforcing sanctions for inefficiency by putting tight limits on subsidies and the money supply. Problems encountered, such 202 Yugoslav-American Economic Relations as inflation, balance-of-payments deficits, and injury to inefficient do- mestic producers, raised a host of other issues including powerful pres- sures to go slow, to proceed by stages, or even to reverse reform programs. On the other hand, the Yugoslav experiences with the failed reforms of the 1960s and the stagnation of the 1980s, ending with hyperinflation, illustrated the dangers of partial reforms or of moving too slowly. The threats posed by austerity associated with economic reform also confront the Soviet Union. The reform plan approved by the Soviet parliament in December, 1989, was therefore conceived in two stages stretched over six years. Further watered down in April, 1990, in order to avoid unemployment, it appears to risk bogging down into ineffective- ness. The fears expressed by Soviet leaders of social unrest if the transi- tion to a free market is too abrupt can be understood, given the massive subsidies to the economy and especially to food prices in the Soviet Union. But similar fears stalled Yugoslav reform efforts in the 1980s, with the result that the country was left with a lower standard of living and heightened social tensions after ten years of austerity, and the main tasks of reform still lay ahead. The comprehensive Yugoslav reform program announced by Prime Minister Markovic in December 1989 gives evidence of having benefited from past experience. Some of these lessons are summarized in Table 7.1. The program announced the same month by the Polish government reflected evident awareness of many of the same lessons. It undertook to sell off state enterprises, end subsidies, rewrite banking and tax laws, reduce inflation, attract foreign investment, and make its currency con- vertible, all in 1990. The Polish plan, like the Yugoslav program, also provided for government-funded welfare programs to assist workers laid off in the course of efforts to achieve greater efficiency of production. Both Yugoslavia and Poland retained American advisers to help them devise and implement their reform programs, which, if successful, could pro- vide positive examples for the rest of Eastern Europe to follow. To the extent that Yugoslavia is able to carry out an effective eco- nomic reform program despite ethnic strife and confrontations in the south and sharp disputes among its several republics, its experience might also prove helpful for the Soviet Union, which is beset with similar regional and ethnic problems. On the whole Yugoslavia’s relations with the West and the United States in particular since World War II have also provided a positive example for the Soviet Union and the countries of Eastern Europe. Over more than four decades, U.S. respect for Yugoslavia’s independence and Tabley7.1. Course of Action Decentralize authority to counteract concentrations of power in capital and pro- mote workers’ democracy. Allow foreign capital in- vestment in joint venture form only, with limited for- eign share. Provide ‘‘safety net’ of credits, subsidies, mergers, etc., to help faltering enter- prises in order to shield workers from adverse im- pact of reforms. Proceed gradually, step by step, with multiple ele- ments of complex economic reform measures, e.g., trade liberalization, currency de- valuation, “real” interest rates, monetary and credit restrictions, bankruptcy en- forcement. Lesson Derived Undercut ability to imple- ment macroeconomic poli- cies, encouraged lower level bureaucratic meddling in business decisions, and re- duced enterprises’ effi- ciency. Discouraged and confused some investors, granting less control over operations than they required. Failed to attract desired amount of capital, skills, and commit- ment. Preserved inefficiency, pe- nalized more productive firms, prevented reforms from going forward. Bogged down economy with reforms only partially completed while adverse side effects of various mea- sures (balance-of-payments deficits, inflation, industrial stagnation, etc.) harmed populace and made comple- tion of reforms even more difficult. Conclusion 203 Some Lessons from Yugoslavia’s Experience Remedy Proposed in 1989/90 Measures Reestablish essential federal economic powers, increase independence and respon- sibility of enterprises, elimi- nate subdivisions (BOALSs, see Chapter 4) of enter- prises. Encourage Western inves- tors by allowing unlimited share, full ownership, and control by foreign investor. Provide government-funded “safety net’’ for workers in form of unemployment compensation and other so- cial benefits. Proceed simultaneously and thoroughly on as many fronts as possible, accepting short-term adverse impacts in order to achieve goals quickly. its right to order its society and economy as it saw fit (with certain reservations in later years concerning human rights) stood in constant rebuttal of doctrinaire Communist fears of capitalist exploitation and aggression. It was thus possible for the Yugoslav example to be not only attractive to the countries of Eastern Europe but also reassuring to the 204 Yugoslav-American Economic Relations Soviet Union that it need not be threatened by the prospect of increased independence for those countries. Economically, aid, trade, technical cooperation, and investment relations with the United States and the West contributed substantially to the Yugoslav example. These relations also contributed to a standard of living that was not only much higher than most Yugoslavs had known before World War II but was substantially higher than that enjoyed by most of theif East European neighbors. Much of Yugoslavia’s industry functions with modern American or other Western capital equipment, and its infrastructure (power, transportation, communication), while lagging behind Western standards in some respects, is generally far superior to that of most of Eastern Europe. Thus, as we have pointed out in earlier chapters, even though some of Yugoslavia’s industrial facilities may have been redundant, badly located, or financed by questionable loans or joint ventures that were not successful, Yugoslavia possesses an enviable physical plant by Soviet or East European standards. Managers and technicians in Yugoslavia’s many independent enterprises have had decades of open trade and investment dealings with American and other Western firms. This experience, including participation in joint ventures and other forms of industrial cooperation, has provided a more extensive upgrading of Yugoslavia’s industrial cadre than has been possible in countries with centralized economies or less extensive trade with the West. Yugoslavia’s experience reinforces the strong inclinations of the Soviet Union and East European countries to couple domestic economic reforms with expanded trade and other economic relations with the United States and the West. Perhaps the most significant lesson for other countries from Yugoslav-American relations over the past four decades is that such a relationship is possible and can work to mutual advantage, but it is no cure-all for the smaller country’s problems. A beneficial economic rela- tionship with the United States cannot take the place of sound and effective policy measures initiated by the country itself. Yugoslav-American Economic Relations beyond a Bipolar World —At the beginning of the twentieth century’s final decade, the events sweeping across Yugoslavia, Eastern Europe, and the Soviet Union made it clear that the future context for Yugoslav-American relations would be profoundly changed from past decades. The Yugoslav Commu- nist Party Congress voted to renounce its constitutionally guaranteed Conclusion 205 leading role and called on the Federal Assembly to institute a multiparty system. When the congress split on other, divisive issues, Prime Minister Markovié said his government would press its vital economic measures forward “with or without the Communist party.’’12 Communist parties throughout Eastern Europe had renounced their political monopolies, all of these countries were seeking new forms of government, and most were trying to initiate some kind of economic reform. The Soviet Union, its own Communist party having renounced its monopoly on power, tried to move forward with political and economic restructuring while heading off threats to its legitimacy from ethnic violence in the south and declarations of independence in the Baltic republics. The Berlin wall, symbol of a divided Europe since its construc- tion in 1961, was opened, and the Warsaw Pact disbanded its Communist political guidance committee. Even U.S. intelligence assessments con- cluded that “unchallenged Communist control has ended . . . Soviet and Warsaw Pact strength and capabilities have declined.’’?3 With all of this change, one pillar of the Yugoslav-American relation- ship remained solid. In the words of American Ambassador Warren Zimmerman, ‘“The United States Government remains steadfast in its support for Yugoslavia’s independence, unity and territorial integrity,’’14 a policy that was first articulated by the Truman administration and has been reaffirmed by every subsequent U.S. president. Relations between business representatives from both countries also remained strong and cordial. Still it is worth examining what changes can be expected in the economic relationship between the two countries in the light of the new circumstances prevailing in the world. As our study makes clear, Yugoslav-American relations have been conducted since World War II against a backdrop of U.S.—Soviet rivalry, the Soviet domination of Eastern Europe, and a perceived Soviet mili- tary threat to Western Europe. Yugoslavia’s membership in the Soviet- dominated Cominform fueled mutual suspicions and confrontations immediately following the war; the American policy of ‘‘keeping Tito afloat’”’ with emergency assistance and economic aid followed Yugosla- via’s expulsion from the Cominform in 1948. Subsequent U.S. official policies consistently (although not without difficulties in Congress) treated Yugoslavia as part of the ‘‘free world,” and geographic references to Eastern Europe made a point of excluding Yugoslavia. The U.S. commitment to support Yugoslavia’s political indepen- dence was understood to include support for its economic viability as well, since Yugoslavia’s economic collapse would leave it no apparent 206 Yugoslav-American Economic Relations choice but to return to quasi-barter trading arrangements on such terms as could be had with its cmea (Council for Mutual Economic Assistance) neighbors to the east. Real political independence could hardly be main- tained under such circumstances. Maintaining its independence was a basic tenet of Yugoslav policy, which enhanced the lives of its people in both tangible and intangible ways. From the American point of view, Yugoslav independence also had strategic significance, blocking Soviet access to the Adriatic and Mediterranean seas, besides demonstrating to the countries of Eastern Europe that existence and progress were possible outside the Soviet bloc. These basically political considerations were in the background, at least tacitly, of all U.S. economic policies regarding Yugoslavia. In addition to the traditional concerns normally brought to bear in relations with other countries—maintenance of friendly relations, trade and other commercial interests—was the added concern that Yugoslavia should not be allowed to “slip back into the bloc.’ By and large this latter-day version of ‘“‘keeping Tito afloat’ worked to Yugoslavia’s advantage, espe- cially in U.S. policy deliberations, to counter the usual American aver- sion to Communist regimes. It brought speedy famine and earthquake relief in 1950, 1952, and 1963, it helped maintain Yugoslavia’s most- favored-nation trading status despite several threats of interruption, and it was instrumental in assuring U.S. economic support for Yugoslavia in times of difficult economic reforms and international debt crises. On the negative side the political commitment to support Yugosla- via’s independence sometimes kept the best purely economic judgments from being applied to Yugoslavia’s circumstances and allowed support for policies that were questionable on economic grounds. We have mentioned concessional sales of foodstuffs (beyond emergency famine relief), which allowed the Yugoslav government to neglect agriculture in favor of premature and over-concentrated industrial development as one example. Another might be the U.S. contributions to financial support packages during the debt crisis of the early 1980s, despite the fact that imF- mandated reform measures were not producing the systemic changes that the Yugoslav economy so sorely needed. We cite these examples not to criticize the actions taken but to point out that the balance was tipped in their favor by the ultimately political concern to preserve Yugoslavia’s independence. In the changed world of the 1990s and beyond, with the likely continuing diminution of a Soviet military threat to either Eastern or Western Europe, this concern will no longer be a significant factor. This does not mean that Yugoslav-American Conclusion 207 relations need be any less positive; it does mean that an element that has long been a fundamental part of any consideration of Yugoslavia’s cir- cumstances will be missing from future equations. In Ambassador Zim- merman’s words, the United States is likely to extend official material support “on a more pragmatic basis in the future.’’15 The fact that the countries of Eastern Europe are trying to create democratic political structures, some of them market-based economic systems as well, also has implications for Yugoslavia. Special financial assistance will be available to them, for example, through a new East European development bank approved by the European Community in November 1989 and constituted by the spring of 1990. The bank’s list of client countries was subsequently expanded to include Yugoslavia. Other official funds have been targeted for East European countries, including internationally supported billion-dollar funds to support eco- nomic stabilization in Poland and Hungary. Yugoslavia will thus have new competition for any officially funded measures to support the development of market economies and demo- cratic institutions. It will also have to compete with new entrants into the market for private investment funds. As we have noted, however, its relatively well-developed infrastructure, modern industrial plant, and broadly experienced work force put Yugoslavia in a good position to enter vigorously into such competition. Real or perceived threats to its political stability or unity, however, would place it at a disadvantage. For its part the United States appears ready to continue positive official dealings with Yugoslavia on an even-handed basis; an Eximbank delegation headed for several East European countries in January 1990 made a point of also including Yugoslavia on its itinerary. Private American traders, investors, and bankers are also watching Yugoslavia’s efforts to maintain its political cohesion and to create a more efficient, market-based econ- omy. If conditions are favorable, they appear prepared to take part in its further growth. In the future, however, such participation is less likely to be related to a perceived external threat than it is to Yugoslavia’s own internal stability and unity, its progress toward becoming a market economy, and the soundness of its policy actions to that end. Notes Abbreviations Used in Notes Belgrade’s—American Embassy Belgrade Report BIR—Bureau of Intelligence Report FRUS—U.S. Department of State, Foreign Relations of the United States NA—National Archives of the United States 1 Introduction: The Pragmatic Pattern of Yugoslav-American Relations 1. See Ivo J. Lederer, Yugoslavia at the Paris Peace Conference (New Haven, Conn.: Yale University Press, 1963), pp. 27-31, 184-217, and Dragoljub Zivo- jinovic, America, Italy and the Creation of Yugoslavia, 1917-1919, East European Monographs, no. 2 (New York: Columbia University Press, 1972). 2. John R. Lampe, “Serbia, 1878-1912,” in Rondo Cameron, ed., Banking and Economic History: Some Lessons of History (New York: Oxford University Press, 1972), pp. 122-67. 3. Recent research has questioned the long-standing notion that pre-1914 Slovenian and especially Croatian industry was larger-scale, more mechanized, or even much more widely spread than Serbian manufacturing. See John R. Lampe and Marvin R. Jackson, Balkan Economic History, 1550-1950: From Imperial Borderlands to Developing Nations (Bloomington: Indiana University Press, 1982), pp. 309-22. 4. Ibid., pp. 160-83, 279-97. 5. “A Century of Immigration,’ Monthly Labor Review 13, no. 1 (June, 1924): 1-19; Imre Ferenzi, International Migration, Vol. 1, Statistics (New York: Arno Press, 1970, reprint of NBER Study, 1929), pp. 266-73, 472-79; George J. Prpic, South Slav Immigration in America (Boston: Twayne Hall, 1978), pp. 155-56, 7Ht3¥3\5 6. See Table 2.1. 7. John R. Lampe, ‘‘Unifying the Yugoslav Economy, 1918-1921: Misery and Early Misunderstandings,” in Dimitrije Djordjevic, ed., The Creation of Yugosla- via, 1914-1918 (Santa Barbara, Calif.: ABC Clio Press, 1980), pp. 139-56. On industrial growth rates, see Marvin R. Jackson and John R. Lampe, “The Evidence of Industrial Growth in Southeastern Europe before the First World War,” East European Quarterly 16, no. 4 (1983): 385-415. 8. Lampe and Jackson, Balkan Economic History, pp. 456-69. 210 Notes 9. See V. Rosenberg and J. Kostic, Ko financira jugoslvensku privredu [Who Finances the Yugoslav Economy?] (Belgrade, 1940), and Sergije Dimitrijevicé, Strani kapital u privredi bivse Jugoslavije [Foreign Capital in the Economy of the Former Yugoslavia] (Belgrade, 1958). 10. Table 11.3 in Lampe and Jackson, Balkan Economic History, p. 386. 11. Nita Watts, ‘Eastern and Western Europe,” in Andrea Boltho, ed., The European Economy, Growth and Crisis (New York: Oxford University Press, 1982), pp. 269, 278; Savezni zavod za statistiku, Jugoslvije, 1945-1985 (Belgrade 1986), p. 154. 12. Robert Pastor, Congress and the Politics of U.S. Foreign Economic Policy, 1929-1976 (Berkeley: University of California Press, 1970), pp. 86—97. 13. Ibid., pp. 189-90, 342-47. 14. Ibid., pp. 256-81, Burton J. Kaufman, Trade and Aid: Eisenhower's Foreign Economic Policy, 1953-1961 (Baltimore Md.: John Hopkins University Press, 1982), pp. 58-107. 15. Mira Wilkins, The Maturing of the Multinational Enterprise: American Business Abroad from 1914 to 1970 (Cambridge, Mass.: Harvard University Press, 1974), pp. 329-31, 374408. 16. For a brief account of the mr’s postwar evolution, see James Foreman- Peck, A History of the World Economy: International Economic Relations since 1850 (Totowa, N.J.: Barnes and Noble, 1983), pp. 331—69; for further details on this early period, see J. K. Horsefield, ed., The International Monetary Fund, 1945— 1965, 2 vols. (Washington, D.C., IMF, 1969). On the isrp’s founding, see Robert W. Oliver, International Economic Cooperation and the World Bank (New York: Holmes and Meier, 1975). 2 From Confrontation to Emergency Aid, 1945—1953 1. The second Blair loan was offered to New York bondholders at 7 percent. It quickly sold out at full price, in contrast to the $15 million sold in 1922 at a discounted price which held the net yield to $12 million. See Linda Killen, “Ekonomski interesi SAD u Jugoslaviji izmedzu dva svetska rata’ [Economic Interests of the U.S. in Yugoslavia between the Two World Wars]. Istorija 20 veka 1-2 (1986): 43-66, and Patrick F. R. Artisian, Joint Ventures in Yugoslav Industry (Gower, Vt.: Gower Publishing Co., 1985), pp. 23-25. 2. Mira Wilkins, The Maturing of the Multinational Enterprise: American Business Abroad from 1914 to 1970 (Cambridge, Mass.: Harvard University Press, 1974), p. 56. This sum of $6.9 million in direct investment was nearly matched by $5 million in private loans, according to Killen in ‘‘Economic Interests of the U.S.,” and was probably exceeded by individual or bank purchases of railway and public utility stocks. 3. Great Britain, Public Record Office, F.O. 371, Confidential Annual Report, Yugoslavia, 1931, pp. 22-23. 4. Statisti¢ki godignjak Kr. Jugoslavije, 1929-31, 1936, 1940 (Belgrade, 1930-32, 1937, 1941). 5. Sergije Dimitrijevi¢, Strani kapital u privredi bivSe Jugoslavije [Foreign Capital in the Economy of the Former Yugoslavia] (Belgrade, 1958), p. 161. 6. Dragana Gnjatovicé, Uloga inostranih sredstava u privednom razvoju Notes 211 Jugoslavije [The Role of Foreign Resources in the Economic Development of Yugoslavia] (Belgrade, 1985), pp. 44-45. 7. Wilkins, Maturing of the Multinational Enterprise, pp. 235, 239; Killen, “Economic Interests of the U.S.” 8. U.S. capital participated in another nineteen enterprises and lent money to eighteen more. Dimitrijevi¢, Strani kapital, p. 161. 9. R. Harris Smith, OSS (New York: Delta Press, 1978), p. 157. 10. Michael B. Petrovich, ““The Independent American Military Mission and Yugoslav-American Relations, 1944-1945,” in Thomas Hammond, ed., The Anat- omy of Communist Take-Overs (New Haven, Conn.: Yale University Press, 1975). 11. Ibid.; Jozo Tomasevich, The Chetniks (Stanford, Calif.: Stanford Univer- sity Press, 1975), pp. 372-84. Also see Branko Petranovic, Revolucija i con- trarevolucija, vol. 2 (Belgrade, 1980). 12. U.S. Department of State, Foreign Relations of the United States (here- inafter FRUS,) 1945, V (Washington, D.C. : GPO, 1947), p. 1293. 13. Ibid., 1947, IV, p. 820; also see Furth Report, ‘“Yugoslavia: Economic and Financial Development,” in National Archives of the United States (hereinafter NA) 860H. 50/8-2146. 14. The American military command never even contemplated such a step, according to available U.S. records, and also believed that its strictures upon American pilots’ overflying Yugoslav territory, except in bad weather, were being observed scrupulously. So did Tito, whose reliance on high-level American assurances reportedly prompted the local Yugoslav fighter command in Ljubljana to force down one U.S. plane and, when Tito still did not believe that this was common practice, to shoot down another one (oral statement by Vladimir Velebit at Wilson Center/Institute for Contemporary History Conference on Yugoslav- American Relations, 1944-65, in Belgrade, Sept. 19—21, 1988). One report from the American Embassy in Belgrade, (FRUS, 1947, IV p. 761) does indeed admit unauthorized overflights performed by individual crews to save time and to bait the Yugoslavs. These were neither authorized by nor even reported to U.S. headquarters and then were exaggerated on the Yugoslav side by multiple spot- tings of the same plane. Also see Intelligence Research Report, Yugoslavia, July 24, 1946, in NA 860H.50, and, on the C-47 incidents alone, RG43, Boxes 128 and 129; 7-2446, pp. 99-105, FRUS, 1946, VI, pp. 915ff., 1947, IV, p. 854. 15. Jozo Tomasevich, ‘‘Immediate Effects of the Cominform Resolution on the Yugoslav Economy,” in Wayne S. Vucinich, ed., At the Brink of War and Peace: The Tito-Stalin Split in Historical Perspective, East European Monograph 124 (New York: Columbia University Press, 1982), pp. 90-98, provides a useful summary. 16. American Embassy Belgrade Report (hereafter Belgrade’s) #9422, Jan. 25, 1946, in NA, 860H. 5034/1-2546. 17. Branko Petranovié, Politiéka i ekonomska osnova narodne vlasti u Jugoslaviji za vreme obnova [The Political and Economic Basis of the Popular Regime in Yugoslavia during the Recovery] (Belgrade, 1969), pp. 256-304. 18. Romania and Greece lagged much further behind. See John R. Lampe and Marvin R. Jackson, Balkan Economic History, 1550-1950: From Imperial Border- lands to Developing Nations (Bloomington: Indiana University Press, 1982), pp. 520-75. 212 Notes 19. George Woodbridge, UNRRA (New York: Columbia University Press, 1950), 2:138—70. 20. Robert A. Pollard, Economic Security and the Origins of the Cold War, 1945-1960 (New York: Columbia University Press, 1985), pp. 116-18. 21. The three-man team sent by LaGuardia spent only two days in Yugosla- via. FRUS, 1946, VI, pp. 967-68; Belgrade’s #706, Mar. 3, 1947, in NA 860H.50/8/3-1147: Furth Report, Yugoslavia, NA 860H.50/8-2146; Woodbridge, UNRRA, 2:161-68. 22. Woodbridge, UNRRA, 2:142—43; Intelligence Research Report, Yugosla- via, pp. 101-3, in NA 860H.50/2446. 23. Pollard, Economic Security, pp. 14-15, 121-27, 232, 245; Stephen D. Krasner, “‘U.S. Commerical and Monetary Policy,” and Charles S. Maier, ‘““The Politics of Productivity,” in Peter J. Katzenstein, ed., Between Power and Plenty (Madison: University of Wisconsin Press, 1978), pp. 53-77 and 24-39. 24. Letter from Rudolf BiGanic, June 19, 1945, in NA 860H.51/7-1945; 860H.S1/10-1245. 25. Belgrade’s #281, Mar. 26, 1946, in NA 860H.50/3-2646, and memoran- dums of conversation with Makeido and Sirc, Feb. 29 and Aug. 30, 1946, 860H.51/2-2846 and 8-3046: FRUS, 1945, V, pp. 1293, 1299, and 1946, VI, pp. 869— 70, 930-33. 26. A list of U.S. assets may be found in Intelligence Research Report, Yugoslavia, in NA 860H.50/7-2446. On trademarks see Belgrade’s #45, Jan. 14, 1948, NA 860H.543/1-1448, and Socony-Vacuum Oil Co. letter, 9-1247, and on the terms of the Yugoslav nationalization law, Belgrade’s #565, Dec. 13, 1946, NA 860H.5034/12-1346. 27. FRUS, 1947, IV, pp. 754, 781, 855. 28. Ibid., p. 771; also see Borba, June 19, 1946. 29. FRUS, 1947, IV, pp. 807-26. 30. For a first-hand account, see Vladimir Dedijer, The Battle Stalin Lost (New York: Grosset & Dunlap, 1972), pp. 73-96. 31. Belgrade’s #656, Aug 4, 1948, in NA 860H.S151/8-448; Belgrade’s #240 and #706, Mar. 10 and 11, 1947, 860H.5018/3—-1047 and 3—1147. 32. FRUS, 1947, IV, p. 826, and 1948, IV, pp. 1057-62; David L. Larson, United States Foreign Policy Toward Yugoslavia, 1943—1963 (Washington, D.C.: University Press of America, 1979), pp. 185—86; Jadranka Jovanovié, Jugoslavija u ujedinjenim nacijama, 1945—1953 [Yugoslavia in the United Nations, 1945-1953] (Belgrade, 1985), pp. 62—65. 33. FRUS, 1949, V, pp. 943, 976; Pollard, Economic Security, 121-27, 205-9, 224-30. 34. Pollard, Economic Security, pp. 137-64. 35. FRUS, 1947, IV, pp. 834-36, and 1948, IV, pp. 1081, 1097-99. Also see John Lewis Gaddis, Strategies of Containment (London: Oxford University Press, 1982), pp. 37-38, 66-67. 36. Policy Planning Staff #35, “The Attitude of This Government Toward Events in Yugoslavia,” June 30, 1948, PSF, Harry S. Truman Library, Indepen- dence, Missouri: FRUS, 1948, V, p. 1113; 1949, V, pp. 855-61; and 1950, IV, pp. 1350, 1416, 1488. For American perceptions, see Lorraine M. Lees, ‘““The Ameri- can Decision to Assist Tito,” Diplomatic History 2, no. 4 (Fall, 1978): 407-22, and Notes 213 Charles G. Stefan, “The Emergence of the Soviet- Yugoslav Break: A Personal View from the Belgrade Embassy,” Diplomatic History 6, no. 4 (Winter, 1982): 387-404. For Yugoslav perceptions see Dragica MugoSa, “‘Sjedinjene Americke Drzave i Jugoslovenski 1948” [The USA and Yugoslavia’s 1948], Istorija 20. veka 1, no. 2 (1983): 59-89; and Leo Mates, Medjunarodni odnosi socialistiéke Jugoslavije [The International Relations of Socialist Yugoslavia] (Belgrade, 1976), pp. 198—204. 37. FRUS, 1948, V, pp. 1105-8, and 1949, V, pp. 854, 878-902; Filipovic Memcon, Mar. 22, 1949, in NA 860H.51/3—2249. 38. Archives of Josip Broz Tito, Belgrade, I-3b, USA, 25, as cited in Cedomir Strbac, “The Policy of ‘Keeping Tito Afloat’: American Aid to Yugoslavia, 1950— 1951,” conference paper, East European Program, Wilson Center, Washington, D.C. Also see Sesije Centralnog Komiteta SKJ, 1948-1952 (Belgrade, 1985), pas- sim. 39. FRUS, 1949, V, pp. 865, 893, 925-31, 946, and 1950, V, pp. 1367-73, 1378, 1438; Memcons with Eximbank officials, June 1—Oct. 11, 1949, in NA 860H.51/6-149, 7-2649, 8-649, 8-2649, 8-3049, 10-1149; 860H.6132/9-1449. 40. Filipovié Memcons, May 9 and July 5, 1951, in NA 868.00/5-951 and 7-551; FRUS, 1951, V, p. 1745. 41. FRUS, 1950, V, pp. 1462, 1481-84; NA 501 Yugoslavia, Economy, 12— 2650. Dean Acheson, Present at the Creation (New York: W. W. Norton, 1969), p. SoZ. 42. Belgrade’s #434, Mar. 15, 1951, in NA 868.00/R/3-1551; Larson, United States Foreign Policy, p. 236. Also see U.S. Congress, Yugoslav Emergency Relief Assistance, House Document No. 112, 82nd Congress, 1st. Sess. (Washington, DIG, 1951): 43. State Department memos, Nov. 21 and Dec. 4, 1950, in NA 500.2 Yugoslav Food Crisis, and Belgrade’s #434, Nov. 25, 1950, NA 868.00/11-2550. 44. State Department to U.S. Congress, in NA 868.00R/3-1551, also 868.00/1-2651; Borba, July 3, 1952. 45. Meier, ‘Politics of Productivity,” pp. 38-39, and Krasner, “U.S. Commer- cial and Monetary Policy,” pp. 74-77. 46. FRUS, 1949, V, pp. 893, 901, 1360, 1379-85. On Yugoslav relations with the 1prp and the mr, see Robert W. Oliver, International Economic Cooperation and the World Bank (New York: Holmes and Meier, 1975), pp. 244—46, and J. K. Horsefield, ed., The International Monetary Fund, 1945—1965 (Washington, D.C.:: IMF, 1969), 2:61—63. 47. FRUS, 1950, V, pp. 1396-1400, 1424—25; State Department’s #5427 to London, in NA 868.00/5-1851; IMF, International Financial News Survey 2 (1949-50): 124-25; 4 (1951-52): 125-26; 5 (1952-53): 253. 48. FRUS, 1950, V, pp. 1417, 1445, 1448, 1469; NA RF84, Belgrade 1950-54, Box 165, Loans to Yugoslavia, 501. 49. FRUS, 1950, V, pp. 1399-1405; Belgrade’s #624 of Feb. 27, 1951, Annual Economic Review for 1950, in NA 868.00/2-2751. 50. Belgrade’s #1067, May 22, 1952, Annual Economic Review for 1951, in NA 868.00/5-2252. 51. FRUS, 1951, V, pp. 1769-72, 1805-6, 1863, 1871, and 1952-54, VIII, pp. 1267-69; London’s #6351, May 4, 1951, NA 868.00/5-451, and State Department memcons on 1952-53 Yugoslav program, 868.00/2-1152 and 3-752. 52. FRUS, 1950, V, p. 3636. 214 Notes 53. Office of Intelligence Research, State Department, 1957 report on Yugo- slavia, in NA 1R7572. 54. Ambassador Allen noted that ‘‘there is serious drought in Hungary but embarassment to [the] regime there does not cause us any serious concern.” FRUS, 1952-54, VIII, p. 1327. Also see Belgrade’s #892, May 5, 1953, in NA 868.00/5-553, and Memcon with Ambassador Allen, Jan. 1, 1953, 868.00/1-553. 55. The two guidelines accepted without qualification were “improving the balance of payments”’ and ‘‘closeness to completion.”’ The qualification applied to “effective international competition” and four other guidelines. FRUS, 1952-54, VIII, pp. 1285-90, 1301-05. Also see Belgrade’s Quarterly Economic Reviews, Dec. 1, 1953 and Aug. 25, 1954, in NA 868.00/12-153 and 8-2554. 56. Belgrade’s #702, Dec. 31, 1952, in NA 868.00/12-3152; J. V. Mladek, E. Sturc, and M. R. Wyczalkowski, ‘““The Change in the Yugoslav Economic System,”’ in IMF Staff Papers (Nov., 1952), pp. 407—38. 57. Belgrade’s #1145 of June 13, 1952, in NA 868.00/6-1352. 58. Gnjatovic, Uloga inostranih sredstava, pp. 50-52, and Tomasevich, “Immediate Effects of the Cominform Resolution,” pp. 113-18. 59. The American bank’s bid was reportedly made only to sustain com- petition with London’s Westminster Bank. FRUS, 1949, V, pp. 893, 901, and 1951, IV, pp. 1788-89; State Department’s Memcon of Mar. 19, 1949, in NA 860H.51/3-2949. 60. Belgrade’s #135 and #832, Feb. 10, 1949, and Mar. 4, 1952, in NA 860H.5034/2-1049 and 868.00A/3-452. 61. Zagreb’s #247, Jan. 12, 1953, in NA 411.68/6/1-1253. 62. Belgrade’s #519, Jan. 12 1953, in NA 411.68/6/1-1253. 3 Soft Loans and Hard Bargaining: Official Relations, 1954—1964 1. Allen Memcon of Feb. 5, 1953, in National Archives of the United States (hereinafter NA) 868.0012-553. 2. Leverich Memcon of Mar. 12, 1954, with Popovié in NA 868.10/3-1254. 3. State Department Instruction CA-5995 of Apr. 21, NA 868.10/4-2154; Colbert Memorandum of June 16, NA 868.10/6-1654. 4. Belgrade’s #846 of June 17, NA 868.10/6-1754. 5. Colbert Memorandum of June 16, 1954, NA 868.10/6-1654. 6. Belgrade’s #846 of June 17, NA 868.10/6-1754, and Belgrade’s #118 of Aug. 12, 1954, NA 868.10/8-1254. 7. Barbour Memcon of Sept. 14, 1954, NA 411.6841/9-1454. 8. Savezni zavod za statistiku, Jugoslavija, 1945-1964 (Belgrade, 1965), pp. 202-5. 9. Title I offered surplus farm produce for sale in the currency of the recipient; Title IV offered sale for dollars, but with an extended repayment period; Title II provided such food for disaster relief; and Title III provided for private relief agencies to distribute, in the fashion of section 550 of the sa. Burton I. Kaufman, Trade and Aid: Eisenhower’s Foreign Economic Policy, 1953-1961 (Baltimore, Md.: Johns Hopkins University Press, 1982), pp. 149-50. 10. Robert A. Pastor, Congress and the Politics of U.S. Foreign Economic Notes 215 Policy, 1929-1976 (Berkeley: University of California Press, 1980), p. 269; David A. Baldwin, Economic Development and American Foreign Policy, 1943-1962 (Chicago: University of Chicago Press, 1966), pp. 131, 144. 11. Barbour and Kalivarji Memcons of Sept. 14 and Nov. 17, 1954, respec- tively, NA 411.6841/9-1454 and 411.6831/11-1754. 12. U.S. Department of State, Foreign Relations of the United States (Here- inafter FRUS), 1952—54, VIII, pp. 1370, 1390-97. ; 13. Belgrade’s A-88, Dec. 2, 1954, NA 411.6831/12-2554; John R. Lampe’s interview with Leo Mates, Mar. 24, 1987; FRUS, 1952-54, VIII, pp. 1423-28. David L. Larson, United States Foreign Policy Toward Yugoslavia, 1943—1963 (Wash- ington, D.C.: University Press of America, 1979), pp. 265-69. 14. John R. Lampe’s interview with Leo Mates, Mar. 24, 1987; John C. Campbell, Tito’s Separate Road: America and Yugoslavia in World Politics (New York: Harper and Row, 1967), pp. 44-46; Robert Murphy, Diplomat Among Warriors (New York: Doubleday, 1964), pp. 422—30; as cited by Dulles to Hamilton Fish Armstrong, Nov. 8, 1955, Dulles Papers, Correspondence Box 98, Mudd Manuscript Library, Princeton University; Lorraine M. Lees, ‘““The United States and Yugoslavia, 1948-1958: The Diplomatic Record,’’ conference paper, East European Program, Wilson Center, Washington, D.C. 15. Table 3.2; Larson, United States Foreign Policy, pp. 286—88. 16. For relevant documents, see Vaclav L. Benes, Robert F. Byrnes, and Nicholas Spulber, eds., The Second Soviet-Yugoslav Dispute (Bloomington: Indi- ana University Press, 1959), and Stephen Clissold, ed., Yugoslavia and the Soviet Union, 1939-1973 (London: Oxford University Press, 1975), pp. 271-88. 17. Kaufman, Trade and Aid, pp. 148—52; on the background to this decision, see National Security Council 5805, ‘U.S. Policy Toward Yugoslavia,” Feb. 28, 1958, NSC Series: Policy Papers Subseries, Box 24, Papers of the President, Dwight D. Eisenhower Library, Abilene, Kansas. 18. Agency for International Development, U.S. Overseas Loans and Grants, Assistance for International Organizations, July 1, 1945 to June 30, 1962 (Wash- ington, D.C.: GPO 1963), p. 126; Godisnji izvestaj narodne Banke Jugoslavije [Annual Report of the National Bank of Yugoslavia], 1959-62; Bureau of Intel- ligence Report (hereinafter sir), U.S. Department of State, July 1960—May, 1961, NA 1R 8328.1-11. 19. The Soviet loan total for 1945-54 was $1.4 billion, in comparison with $9.5 billion in loans from the United States; plus another $47.5 billion in U.S. grants. Kaufman, Trade and Aid, pp. 58—64. 20. Ibid., pp. 64-66, 96-98. 21. Ibid., pp. 101-7. 22. Written comment to author from Leonard Weiss, Economic Counselor, American Embassy Belgrade, 1957-60. 23. Baldwin, Economic Development, pp. 183, 204—5. 24. Edward S. Mason and Robert E. Asher, The World Bank since Bretton Woods (Washington, D.C.: Brookings Institution, 1973), p. 116; Baldwin, Eco- nomic Development, pp. 141, 213. 25. Ibid. 26. Baldwin, Economic Development, p. 183. 27. Yugoslav foreign debt had risen to $526 million by the end of 1959, with 216 Notes 52 percent due within 5 years and 95 percent due within 10 years. BIR, July, 1960— June, 1961, NA, 1R 8328, 1-11, 1R 8420. 28. Ibid. 29. Larson, United States Foreign Policy, pp. 292-97; Campbell, Tito’s Separate Road, pp. 48-56. 30. Larson, United States Foreign Policy, pp. 292—94. 31. Ibid., pp. 305-16; Campbell, Tito’s Separate Road, pp. 61-64. 32. Stephen C. Markovich, ‘“‘American Foreign Aid and Yugoslav Interna- tional Policies,’ East European Quarterly, 9, no. 2 (1975): 185-93. 4 Yugoslav Growth, Market Socialism, and Economic Relations with the West 1. Harold Lydall, Yugoslav Socialism: Theory and Practice (Oxford: Claren- don Press, 1984), pp. 1-2. 2. Yugoslav gross social product (csp) grew only 0.6 percent from 1980 to 1985. See note to Table 4.1. As an indicator of economic growth, csp growth can be taken as virtually identical to GNp growth. Savezni zavod za statistiku [Federal Statistical Office, hereinafter FSO], Yugoslavia 1945-1985 (Belgrade, 1986), p. 74. 3. Ibid. 4. These expectations of economic betterment remained, however, and would have to be dealt with in future years, as we shall see. 5. Lydall, Yugoslav Socialism, pp. 66—67. 6. Ljubisa S. Adamovicé, ‘“‘The Foreign Trade System of Yugoslavia,” in Radmila Stojanovic, ed., The Functioning of the Yugoslav Economy (Armonk, N.Y.: M. E. Sharp, 1982), p. 146. 7. Milovan Djilas, The Unperfect Society (New York: Harcourt, Brace & World, Inc., 1969), pp. 221-22. 8. Borba, June 27, 1950. 9. Ivo Perisin, Novac, kredit i bankarstvo u sistemu samoupravljanja [Money, Credit, and Banking in the Self-Management System] (Zagreb, 1975), pp. 7-8. 10. Sluzbeni List [Official Gazette] No. 43/50. July 5, 1950, Act No. 391. 11. Branko Horvat, The Yugoslav Economic System (Armonk, N.Y.: M. E. Sharpe, 1976) p. 11. 12. In fact the workers frequently acted as if they were owners rather than “mere” trustees. See Berislav Sefer, ‘Personal and Public Consumption,” in Stojanovic, Yugoslav Economy, p. 260. For an excellent analytical description of Yugoslav business enterprises as legal entities, see James C. Connor and Branko Vukmir, “The Legal Anatomy of a Yugoslav ‘Enterprise,’’’ The Business Lawyer 32, no. 1, (Nov., 1976), pp. 99-117. See also Harold Lydall, Yugoslavia in Crisis (Oxford: Clarendon Press, 1989) p. 76, who insists that ‘‘socially owned” property remains ‘‘in practice owned by the state (which is in turn controlled by the party).”’ 13. FSO, Yugoslavia 1945-1985, p. 74. 14. Adamovié¢, ‘‘Foreign Trade Systems,” pp. 152-53. 15. Milan Aleksié and Milorad Unkovié, ‘‘Medjunarodna trgovinska politika i spoljnotrgovinski sistem Jugoslavije” [International Trade Policy and the Notes 217 Yugoslav Foreign Trade System], Savremena administracija [Modern Manage- ment], Belgrade, 1979, pp. 131-33. Lydall, Yugoslavia in Crisis, denies that socially owned enterprises (which he argues remain state-owned) were actually independent. 16. Adamovié¢, ‘Foreign Trade Systems,” pp. 154-58. 17. Continuing increases in the price of Yugoslav products diminished the initial advantage of the 1965 devaluation. Then the worldwide introduction of floating international exchange rates in 1971 facilitated rapid adjustment for differences between the rate of inflation in Yugoslavia and its major trading partners. By June of 1980 the rate of the (new) dinar had declined to 27 to the dollar. With accelerating inflation and the pressure of heavy foreign indebtedness in the early 1980s, the dinar exchange rate fell to 410.37 to the dollar by October 1986 and precipitously to 1300 by December of 1987. Source: Beogradska Banka, Foreign Exchange Rates, Sept. 2, 1987. 18. Adamovié¢, “Foreign Trade Systems,” pp. 155—56. 19. The categories were as follows: —Free imports against payment in dinars —Conditionally free import of certain other goods; i.e., free if they could not be obtained from countries with which Yugoslavia had a bilateral “clearing” arrange- ment —Global foreign exchange quotas granted to selected industries and allocated by agreement among the producers within an industry —Commodity quotas for small quantities of certain goods required in the Yugoslav market —Armaments and medicines, under permit issued by the Federal Secretariat for National Defense —Incentive imports, allowed on the basis of realized exports (from preexisting regulations) —Capital equipment, under allotments of foreign exchange made to the governments of Yugoslavia’s six constituent republics and two autonomous provinces (the potential for using this category of imports to support politically determined rather than economically justified projects can readily be seen) —Strategic reserves, administered by the (federal) Material Reserves Adminis- tration and Food Product Reserves Administration to guard against shortages of food or key raw materials or intermediate products 20. Aleksi¢ and Unkovié¢, ‘““Medjunarodna trgovinska politika’; Milos Sret- novi¢, Ekonomski odnosi Jugoslavije sa inostranstvom [Economic Relations of Yugoslavia with Foreign Countries] (Pristina, 1968); and Savezna Skupstina, Devizni i spoljnotrgovinski rezim [Foreign Exchange and Foreign Trade Regime] (Belgrade, 1966) were used as main sources for analysis of the changes in foreign trade policy established by the Reform of 1965. 21. Belgrade’s A-150, Sept. 4, 1967. See also Miodrag Sukijasovié and Djura Vujacic, Industrial Cooperation and Joint Investment Ventures Between Yugoslav and Foreign Firms (Belgrade, 1968) for analysis of the original legislation and an early agreement concluded thereunder. 22. Kiro Gligorov, ‘““The Social and Economic Basis of Socialist Self- Management in Yugoslavia,” in Stojanovic, Yugoslav Economy, p. 4 23. Almost half of those workers returned to Yugoslavia following the first 218 Notes and second oil shocks, so that by the mid-eighties the number of Yugoslavs still working abroad had been reduced to about 700,000. 24. Savez sindikata Jugoslavije: Rad, nedeljni organ [League of Trade Unions of Yugoslavia: Labor, weekly], Belgrade, Sept. 24, 1968. 25. Isaac Adizes, Industrial Democracy, Yugoslav Style (New York: The Free Press, 1971), pp. 78-80. Lydall, Yugoslavia in Crisis, pp. 78—79, also identifies the problem of local political interference in business affairs. He attributes this to persisting elements of paternalistic state socialism (‘‘the workers were not to be trusted to manage their own affairs’’) rather than to political opportunism and power struggles. The harmful effects of such intervention are undisputed in any case. 26. NIN [Nedeljne Informativne Novine, ‘‘Weekly Informative Newspaper’’], Belgrade, Mar. 13, 1983; Intervju (Belgrade) No. 187, Aug. 5, 1988. 27. Dugan Sekulié, ‘Sta sa smederevskom Zelezarom?” [What to Do with the Smederevo Steel Mill?] NIN, Sept. 6, 1987, p. 9. As a leading Belgrade banker told the authors, ‘‘Each republic has its own ‘Smederevo.’”’ 28. Telex No. 01-108, Jugobanka to Chase Manhattan, Oct. 4, 1956, from Jugobanka archives. 29. See Dennison Rusinow, The Yugoslav Experiment, 1948-1974 (Berke- ley: University of California Press, 1977), p. 64, and sources cited therein for an interesting account of the resolution of ideological issues underlying the decision to move from grants to credits in financing industrial investment. 30. The cir was administered in the National Bank by Dr. Augustin Papié¢, managing director for investment, who became the first president of the Invest- ment Bank when it began operations and served from 1956 to 1960. Interview with Dr. Papié, June 10, 1987. 31. Ibid; also interview June 11, 1987, with Dragomir Milkovié, president of the Yugoslav Investment Bank, 1969—74. 32. Eximbank records of Yugoslav bank guarantees support the loan/ guarantee pattern as described. 33. Eximbank loan records contain examples of both “‘specialized bank” and National Bank guarantees. In 1971 Eximbank requested and got a “‘letter of comfort” from the Yugoslav National Bank which undertook to guarantee Yugoslav commercial bank obligations, including specialized bank obligations, on a case-by-case basis should Eximbank so request. 34. See the text of the Constitution of the Socialist Federal Republic of Yugoslavia, published by the Yugoslav Federal Assembly, Belgrade, 1974. 35. ‘“‘Zakon o deviznom poslovanju i kreditnim odnosima sa inostranstvom,” Sluzbeni list SFRJ, broj 15, Beograd, 1 mart 1977 [‘‘Law on Foreign Exchange Transactions and the Credit Relations with Foreign Countries,” Official Gazette of Yugoslavia, No. 15, Belgrade, March 1, 1977]. 36. ‘““Zakon o prometu robe i usluga sa inostranstvom,” Sluzbeni list SFRJ 15/1 mart 1977 [‘‘Law on Trade in Goods and Services with Foreign Countries,” Official Gazette of Yugoslavia, No. 15, March 1, 1977]. 37. World Development Report, 1979 (The World Bank, 1979). 38. Savezni zavod za statistiku, Statistika spoljne trgovine SFRJ [Federal Statistical Office, Foreign Trade Statistics of Yugoslavia] (Belgrade, 1985). See explanation of Gross Social Product (csp, comparable to cnr) in note a to Table 4.1. Notes 219 39. Ibid. 40. Ljubi8a S. Adamovié¢, “Yugoslav Foreign Economic Relations,” in Pro- ceedings and Reports, Center for Yugoslav-American Studies, Research, and Exchanges, Florida State University, Tallahassee, Vol. 17, 1983. 41. Ibid. 42. From $212 million in 1955, Yugoslavia’s foreign exchange receipts from invisibles more than doubled to $482 million in 1965 then jumped to more than $4.6 billion in 1975 and $7.2 billion in 1984. FSO, Yugoslavia 1945-1985, p. 160. 43. Ekonomska Politika (Belgrade), Dec. 7, 1984. 44. Yugoslav citizens resident in Yugoslavia may maintain foreign exchange accounts in domestic banks. Until 1984 interest on these accounts was paid in foreign exchange and charged as a foreign exchange outflow in Yugoslav balance of payments statistics. 5 Enter the Businessman: Commercial Relations from the 1960s 1. National Security Council, National Security Action Memorandum No. 212, Dec. 14, 1962 (National Security Action Memorandums, Box 1, LBJ Library, Austin, Texas). : 2. Special Committee on U.S. Trade Relations with the Soviet Union an Eastern Europe, Country Paper: Yugoslavia, Mar. 15, 1965 (National Security File/ Committee File, Box 16, LBJ Library, Austin, Texas). 3. Ibid. 4. American Embassy Belgrade Report (hereinafter Belgrade’s) A-667, Dec. ig; 1971" 5. Some examples included missions by the State of Delaware in June, 1964, the State of Maryland Port Authority in September, 1964, and the City of Min- neapolis and the State of Connecticut in the spring of 1967. Belgrade’s A-616, Jan. 16, 1965, and A-818, June 1, 1967. 6. Belgrade’s A-527, Dec. 31, 1965. 7. “Relations between Yugoslavia and the United States of America: (II) Economic Relations,”’ Yugoslavia Survey, No. 2/88 (Belgrade), p. 139. 8. Ibid., p. 150. 9. These were consolidated into a single $55 million package and paid off in 1968 together with $22 million in interest and fees. Source: Eximbank records. 10. Ibid. 11. Eximbank press release, Mar. 6, 1990. 12. The earliest trading companies also included Jugoexport, Intertrade, Interexport, and Astra. ; 13. Interviews with Genex executives Andrea Dozet, deputy general man- ager, and Zoran Rivkov, international economist, in May and June, 1987. 14. The wooden chairs in the Department of State cafeteria at that time were imported from Yugoslavia. 15. In 1964 Andrea Dozet, then head of Impex Overseas, Genex’s New York- based firm in the United States and later deputy general manager of Genex, told Russell O. Prickett, ‘““They’ve given me the hardest job in the world, but if I can sell here, I can sell anywhere.”’ 220 Notes 16. Genex, however, has not always appeared as the importer or exporter of record. 17. The authors are indebted for the description of these transactions to Igor Schou-Kjeldsen of Frankfurt, interviewed in Belgrade, May 9, 1987. 18. “Douglas Hams It Up,’’ Business Week, Mar. 28, 1970. 19. Interviewed in Long Beach, California, Mar. 18, 1987. 20. ‘‘Countertrading Grows,” The Wall Street Journal, Mar. 13, 1985. 21. The Wall Street Journal, Feb. 6, 1984. 22. “Yearning for Yugos,’’ Fortune, May 13, 1985. 23. Borba, May 8, 1985. 24. The Washington Post, Jan. 31, 1989. 25. Patrick J. Nichols, ‘‘Western Investment in Eastern Europe: The Yugoslav Example,” in The Economics of Eastern Europe, Joint Economic Committee of the Congress of the United States, Aug. 16, 1974, p. 734. 26. Article 27 of the Yugoslav Constitution of 1971, Privredni Pregled (Bel- grade), Sept. 3, 1971. This protection did not extend to changes in the tax law, however. 27. Nichols, ‘‘Western Investment,” p. 735. 28. See, for example, Miodrag Sukijasovic and Djura Vujacic, Industrial Cooperation and Joint Investment Ventures Between Yugoslav and Foreign Firms (Belgrade, 1968); also James C. Connor and James R. Offutt, “Joint Ventures in Eastern Europe” in Robert Starr, ed., East-West Business Transactions, (New York: Praeger, 1974), pp. 500-524. 29. There have been differing views on this point. Although the early legislation has been described as allowing a foreign director, participants in negotiations have insisted they were required by law to stipulate that the director be a Yugoslav. 30. Vjesnik (Zagreb), Mar. 30, 1978. 31. Records of the International Investment Corporation for Yugoslavia and the American Embassy, Belgrade. 32. In the main these requirements were: (1) The foreign partner’s share of capital must be less than that of the Yugoslav partner—the ‘49/51 percent rule”’; (2) Foreign investment was barred from banking, insurance, internal transporta- tion, trade, public utilities, or other public services; (3) Increases in output, exports, productivity, and modernization must be provided for in the contract, as well as adequate financing to support them; (4) Internationally recognized norms of joint venture behavior must be adhered to; (5) The contract could not discrimi- nate against the Yugoslav partner, attribute unrealistic values to the foreign partner’s nonfinancial contributions, or affect unfavorably the security or defense of Yugoslavia. Conner and Offutt, “Joint Ventures in Eastern Europe.” 33. Business Eastern Europe, Dec. 7, 1984. 34. Nichols, “Western Investment,” p. 736. 35. Belgrade’s #10046, Dec. 11, 1984. 36. Amendment XV, Paragraph 2, Amendments to the Constitution of the Socialist Federal Republic of Yugoslavia, srry Assembly, Federal Chamber, Belgrade, Oct. 22, 1988. 37. Foreign Investment Law, Articles 5-10, Sluzbeni List [Official Gazette] 77/88, Belgrade, Dec. 31, 1988. Notes 221 38. Ante Markovic¢, address to presidium session of the Socialist Alliance, Belgrade, Jan. 25, 1989. 39. Source: usyec Archives. In 1983 Richard Johnson, by then retired from the Department of State, became president (operating officer) of usyec. 40. U.S.-Yugoslav Economic Council, Business News, vol. 7, no. 8 (Aug. 1982). 6 Paying the Piper: Borrowing, Lending, and the Debt Crisis 1. Paradoxically, even when investment plans stressed an import- substitution strategy, the priority industries tended to be capital- and import- intensive, maintaining pressure on Yugoslavia’s external balance of payments. Laura D’Andrea Tyson, The Yugoslav Economic System and Its Performance in the 1970s, pp. 36-37. 2. Total gross foreign indebtedness (in millions of U.S. dollars) for the years indicated: 1968 1970 1972 1974 1976 1978 1980 1892 1,840 2,350 3,933 5,652 8,002 11,833 18,395 20,262 source: National Bank of Yugoslavia. 3. Dennison Rusinow, The Yugoslav Experiment, 1948-1974 (Berkeley: University of California Press, 1977), pp. 63-64. 4. As divisions in the Croatian party deepened, the unity of Yugoslavia itself was seen to be threatened. In December of 1971, after a climactic meeting with President Tito, Croatian party leaders who had sided with a militantly nationalist movement within the republic were forced to resign. Within the next year Serbian party leaders who had allegedly sided with the purged Croatians had followed suit. For an account of these events, see Rusinow, Yugoslav Experiment, pp. 245— 342. 5. See Branko Colanovic, Dugovi Yugoslavije [Yugoslavia’s Debts] (Dneve- nik: Novi Sad, 1985). 6. Ibid. 7. Ibid. 8. Ibid. 9. Laura D’Andrea Tyson and Gabriel Eichler, Continuity and Change in the Yugoslav Economy in the 1970s and 1980s, Eastern European Countries Studies 1980, Joint Economic Committee (Washington, D.C.: GPO, 1981) p. 202. 10. Interview with Dr. Augustin Papic, first president of Yugoslav Invest- ment Bank, June 10, 1987. 11. Auditors acting for creditor banks in 1983 found it a Herculean task, in the absence of accurate National Bank records, to sort out the payments owed by and through dozens of Yugoslav banks to hundreds of foreign creditors. 12. When one of the country’s largest commercial banks, Privredna Banka Zagreb (psz) failed to meet payments in July, 1982, one creditor asked, “What could we do, shut down all of Croatia?” 222 Notes 13. William Burger, Gerard Kester, and Guus den Ouden, Self-Management and Investment Control in Yugoslavia (The Hague: Institute of Social Studies, 1977), pp. 185, 187. 14. Inthe late 1970s the U.S. Department of State’s Bureau of Intelligence and Research addressed this issue in several preliminary studies under the rubric “Money in the Bank vs. Oil in the Ground.” 15. Babié and Primorac, ‘‘Some Causes of the Growth of the Yugoslav External Debt,” Soviet Studies 38 (Jan. 1986): p. 72. 16. Among the credits Yugoslavia received from the mr to help pay for oil imports during this period were $151.1 million in February and $65 million in March, 1976. 17. Dragana Gnjatovi¢, Uloga inostranih sredstava u privrednom razvoja Jugoslavije [The Role of Foreign Resources in Yugoslavia’s Economic Develop- ment] (Belgrade, 1985). 18. Among the American banks, Manufacturers Hanover joined with Ex- imbank to lend $17 million to ina Naftaplin for two chemical plants (poi and pINA); Chase, Citicorp, and Morgan loaned $50 million for a ferronickel plant (FEN1) in Kavadarci, Macedonia, in 1978; and Chemical Bank arranged a $20 million European loan for the Yugoslavian petroleum industry in 1977. 19. Distorted factor and output prices frequently made such analysis impos- sible. The Krsko nuclear power project provided an example of this problem. With the price of electricity subject to government controls for public policy reasons, meaningful analysis of the plant’s economics could not be carried out. On the other hand the project had government approval at the republic (Slovenia and Croatia) and federal levels and the guarantee of two of the strongest banks in the country, psz of Zagreb in Croatia and Ljubljanska Banka of Ljubljana in Slovenia. All parties were aware that the grace period (before loan repayments were scheduled to begin) would expire before the plant was scheduled to start earning revenue but assumed that an extension of the loan would later be possible. This was common practice at the time. 20. Individual bankers expressed ambiguity on the question of whether loans to Yugoslav enterprises and banks were classed as ‘“‘commercial risk’’ or ‘‘sover- eign risk.”’ 21. Especially from the World Bank, which granted 20 loans totaling $1.3 billion in the years 1977-80. Yugoslavia and the World Bank (Belgrade, 1985), p. 41. 22. Convertible debt service payments had risen from 22 percent of convert- ible earnings in 1976 to 34 percent in 1980. 23. Derived from sis and private commercial bank sources. 24. Among the events contributing to the nervousness of the North American banking community in early 1982 were the Drysdale Securities bankruptcy in New York, the failure of the Penn Square Bank in Oklahoma (with reverberations among several other banks that had purchased its paper), the Dome Petroleum failure in Canada, and the International Harvester Co. debt consolidation negotia- tions. 25. Muenchner Schroeder in Germany and Banco D’Ambrosiano in Italy. 26. In April of 1982, in preparation for assignment in June as economic counselor to the American ambassador to Yugoslavia in Belgrade, Russell O. Notes 223 Prickett consulted with officers of several American banks that had done substan- tial business with Yugoslavia. These included (but were not limited to) Bankers Trust Company, Chase Manhattan Bank, Chemical Bank, Citibank, Irving Trust Company, Manufacturers Hanover Trust Company, Marine Midland Bank, and Morgan Guaranty Trust Company. The author also met with representatives of these and many other American banks during their numerous business trips to Yugoslavia between June 1982 and July 1985. While particulars of these discus- sions were and are confidential, they provide a basis for the author’s sense of bankers’ views and perceptions as presented in this chapter. Responsibility for any errors in presentation rests, of course, with the author. 27. Wall Street Journal, Apr. 23, 1982. In retrospect it became evident that Eagleburger’s purpose could only have been accomplished (if at all) in a smaller meeting in New York with the heads of the leading New York banks, rather than the midlevel bank managers who attended the Washington meeting. Unfor- tunately, however, world events made it impossible for Eagleburger to leave Washington at the time. 28. The five banks were Beogradska Banka, Jugobanka, Ljubljanska Banka, Privredna Banka Sarajevo, and Zagrebacka Banka (not pBz). 29. Several ‘‘side deals’’ were made with leading banks in the syndication in order to bring the total amount of the loan up to the minimum $200 million. In the light of these arrangements, the actual funds available from the loan were substan- tially less than $200 million. 30. Federal Executive Council (cabinet) member Janko Smole to Russell O. Prickett, July 4, 1982. 31. And this was just the beginning. By embassy estimates Yugoslavia’s debt repayments coming due would average over $5 billion for each of the next four years, beginning in 1983, before they would begin to taper off in 1987. With exports and the tourist trade hard-hit by the worldwide recession, Yugoslavia’s balance of payments on current account had plunged to a $3.5 billion deficit in 1981. 32. Strategic concerns were highlighted in U.S. Government consideration of the problem at the working as well as executive level. State Department officers, while corresponding informally with embassy staff in Belgrade, asked for help in preparing to answer some tough questions from other U.S. government agencies, including “What does the U.S. get out of it, besides the warm feeling that our security interests are being taken care of?” The embassy staffers replied sharply (also informally): ‘‘The phrase ‘security interests’ is sometimes a cliché, but in this case it represents reality. It is a fact that Soviet influence ends at the Danube rather than the Adriatic, it is a fact that the Yugoslav people’s considerable energies are directed inward trying to solve their own problems rather than outward making trouble for their neighbors, and it is a fact that Yugoslavia’s defenses are aimed primarily eastward rather than westward. These facts have benefitted the United States at minimal cost for over thirty years, but they cannot be taken for granted.” 33. The “first group” of countries included, besides the U.S., France, (West) Germany, the United Kingdom, Italy, and Switzerland. To these were added Canada, Austria, Japan, Belgium, the Netherlands, Denmark, Finland, Sweden, Norway, and later Kuwait. Those who were concerned originally that other countries might have been reluctant to share in the effort need not have worried. 224 Notes Shortly after reports of a Yugoslav ‘‘rescue package”’ were published, a representa- tive of the Norwegian ambassador called at the American Embassy in Belgrade to express the interest of the Nordic countries and seek further details. The Nordic countries eventually made substantial credits available. On the other hand Kuwait, a substantial creditor, was at first inadvertently omitted from the credi- tor’s group in 1983, a fact that later led to complications in assembling the “‘package.”’ 34. Estimates ranged between The Wall Street Journal’s guess of one billion dollars (Dec. 7, 1982, p. 3) and seven billion by Wharton Economic News Perspectives (July 11, 1983, p. 10). 35. L. A. Whittome, interviewed Apr. 23, 1987. 36. Ibid. 37. For a good description of the Paris Club and its operations, see Roland Plan, External Debt Rescheduling (Vienna: Manzsche Verlag, 1985), pp. 27-39. 38. Federal Reserve statistics. 39. International Monetary Fund, International Financial Statistics (Wash- ington, D.C., 1985). 40. It was the judgment of the American Embassy in Belgrade that use of the dread term “rescheduling’”’ would provide ammunition to opponents of Prime Minister Milka Planinc’s new government that could be used in an attempt to discredit her policy of economic and financial cooperation with the West. Credi- tors went to considerable lengths to avoid characterizing their dealings as ‘‘debt rescheduling negotiations.”’ The eventual agreement signed for 1983 referred to “debt consolidation.” 41. One banker remembers the meeting lasting “‘from 10:00 a.m. to 4:00 p.m. without lunch or break.”’ Whittome recalls, ‘‘We kept them in the room until they were committed.”’ 42. The National Bank of Yugoslavia did not at this time have accurate records of the debt. An international accounting firm, Peat, Marwick, Mitchell & Co. of London, was engaged to reconcile conflicting data supplied by the lending banks and the Yugoslav borrowers, a task that took several weeks to complete. 43. Fulvio Dobrich, senior vice-president, Manufacturers Hanover Trust Company, interviewed Apr. 30, 1987. 44. The imr’s Whittome was more outspoken: ‘‘We never could have done it without the help of Ambassador Anderson and the embassy team.”’ Interview Apr. 23, 1987. 45. Borba, July 25, 1983, p. 7. 46. Peat, Marwick, Mitchell & Co. of London. 47. Politika, July 4, 1983, p. 1. 48. The Wall Street Journal, Oct. 7, 1983, p. 36. 49. 1srp Documentation. 50. Denmark, Finland, and Japan, for example, according to the Yugoslav press. Danas, Aug. 2, 1983. 51. Ibid. 52. Ibid; also Politika, Aug. 26 and Sept. 7, 1983. 53. Even under these favorable terms, some U.S. banks were leery of partici- pating (especially if they had been “‘burned”’ on ccc loans to Poland, losing the 8 percent of the principal they had at risk plus interest on the whole transaction). Notes 225 Other banks familiar with Yugoslavia stepped in, however, led by the Bank for Cooperatives of Denver, and the U.S. credit was fully utilized. 54. Dragana Gnjatovic¢, “Cooperation with International Financial Organiza- tion, 1984—85,”’ in Yugoslavia Survey (Belgrade) Nov. 4, 1986. 55. A potential snag in the ccc program was narrowly averted when the ccc cabled the American Embassy in Belgrade to seek a Yugoslav government guaran- tee on further credits to Jugobanka, which was fast approaching ccc’s administra- tive limit ($100 million) on credits to any individual bank (there was no per- country limit). The embassy’s response, that Jugobanka was in fact administering a country-wide program and should therefore be exempted from the per-bank limit, was to no avail. At the same time the Yugoslav government, which had not given guarantees for ccc credits in recent years, was not prepared to do so in this instance. The embassy tried again. Yugoslav law already gave the National Bank the power to commandeer all available exchange resources in order to meet ‘‘fixed and guaranteed” foreign obligations, it argued. This law surely applied to the ccc credits and was already in effect a government guarantee which would provide the security ccc needed. If necessary an official Yugoslav government statement to this effect could probably be obtained. The ccc reluctantly accepted this solution and requested the statement, which Ambassador Anderson obtained through an exchange of letters between himself and Secretary of Finance Vlado Klemencic. The ccc credits continued. 56. Derived from mr data. 57. The Wall Street Journal, Mar. 8, 1983, p. 38. 58. International Monetary Fund, International Financial Statistics Year- book (Washington, D.C., 1987). 59. Such covenants typically include language along the following lines: “Pari Passu Status: The obligor agrees that it will ensure that at all times the claims of the creditor(s) under this agreement rank at least pari passu in all respects with all other unsecured external indebtedness of such obligor. Negative Pledge: The obligor agrees that it will not create or allow any lien with respect to any of its existing or future properties, including international monetary assets.” 60. Danas, Aug. 2, 1983. 61. The Wall Street Journal, Dec. 3, 1983, p. 5. 62. Inthe American Embassy in Belgrade, a cartoon was circulated showing a staffer who had been active during the 1983 negotiations breathlessly crossing a finish line while Ambassador Anderson, in coach’s garb, waved him on for another lap! 63. This analysis was presented in an address, ““How Does Yugoslavia Look to Eximbank?”’ by the bank’s senior economist Dr. John H. Huber at the U.S.- Yugoslav Economic Council meeting in Dubrovnik, June 6, 1984. 64. Ibid. 65. The Wall Street Journal, May 17, 1984, p. 35. The agreement was not implemented, however, until June, because of confusion described below over Yugoslavia’s eligibility to draw its first tranche under the wr standby that had just been signed in April. 66. By this time Kuwait had joined the original fifteen ‘Friends of Yugo- slavia.” 67. mr staff estimates. 226 Notes 68. This information was published extensively in the press. A Politika article, for example, described the entire process of negotiating an agreement and the linkage between meeting the economic performance criteria and being able to draw on the fund resources, thus triggering the entire financial support package. “What is a letter of intent?” Politika, Apr. 1, 1984, p. 7. 69. With no significant change in Yugoslavia’s policies. 70. A Borba cartoon showed a mother urging her baby to ‘“‘Say Mama!” The child replied ‘““MMF!”’ (the mr’s initials in Serbo-Croatian for Medjunarodni Monetarni Fond). 71. Article IV of the mmr Articles of Agreement provides for periodic consulta- tions of member governments with the mr concerning the appropriateness of their economic policies; hence the phrase ‘“‘Article IV Consultations.”’ 72. Ekonomska Politika, Nov. 5, 1984. 73. The American Embassy urged Washington to consider multi-year refi- nancing favorably, arguing that the annual rescheduling negotiations preempted the time of Yugoslavia’s economic policymakers from other urgent business. 74. The Wall Street Journal, Dec. 10, 1984, p. 30. 75. Particularly officials in the U.S. Treasury Department. 76. The Netherlands, Finland, Norway, Sweden, and possibly some others were in this category. 77. France, Germany, and the United Kingdom were among those whose ambassadors in Belgrade were thought by the Yugoslavs to favor multiyear refinancing but opposed it in meetings of the Group-5 finance ministers. 78. The meeting took place in Paris but was not technically a meeting of the “Paris Club,” which had adjourned after considerating other countries’ debt rescheduling and moved across town to take up the case of Yugoslavia in its capacity as the Yugoslavia Consolidation Group (with a French chairman). There were no longer any subgroups, Group B having been disbanded after the 1984 meeting. 79. Lawrence Brainard, senior vice president, Banker’s Trust Company, New York, and chairman of the 1cc’s Economic Subcommittee, interviewed Apr. 24, 1987. 80. The other Yugoslav banks were Beobanka and Investbanka of Belgrade, Ljubljanska Banka, Privredna Banka Sarajevo, Stopanska Banka Skopje, Kosovska Banka of Pristina, Investiciona Banka Titograd, Udruzena Banka Hrvatske of Zagreb, Novosadska Banka, and Vojvodjanska Banka of Novi Sad. 81. From the 1983 rescheduling agreement. 82. As described by Secretary Rikanovié, these measures included extensive reform of the bankruptcy and accounting laws so as to require enterprise income to be calculated and taxed on a more realistic basis, with bankruptcy a genuine possibility in the event of business failure. Presentation by M. Svetozar Rikanovié, Federal Secretary of Finance of Yugoslavia, at the Paris Club, Mar. 10, 1987. 83. Address of Prime Minister-designate Ante Markovicé to the Yugoslav Socialist Alliance, Belgrade, Jan. 28, 1989. 84. Address of imr Assistant Director for Europe Johannes van Houten to U.S.-Yugoslav Economic Council briefing session in New York, Nov. 20, 1989. Notes 227 Z Conclusion: Crisis, Reform, and Yugoslav-American Relations 1. Harold Lydall, Yugoslavia in Crisis (Oxford: Clarendon Press, 1989), pp. 40-71. 2. Ante Markovic, address to the Yugoslav Federal Assembly, Jan. 16, 1989. 3. Amendments to the Constitution of the Socialist Federal Republic of Yugoslavia, srry Assembly, Federal Chamber, Belgrade, Oct. 22, 1988, Amend- ments XIII, XIV, XV, XIX, XXI, and XXII. Amendment XXI, paragraph 5, provided that independent workers “‘in citizens’ ownership” could employ other workers as specified by law. Also Law on Enterprises, Article 2, and Foreign Investment Law, Articles 5-10, Sluzbeni List 88/77, Dec. 31, 1988. 4. By this time negotiations were well under way on a standby arrangement with the mr. Although over $7 billion of foreign commercial bank debt had been rescheduled earlier in the year, formal rescheduling of official debt by the Paris Club governments awaited agreement on a standby, as did several hundred million dollars of World Bank credits. No linkage of the Markovic government’s economic package with the standby negotiations was emphasized publicly, but it can be seen from some of the terms of agreements described in Chapter 5 that several of the 1989 measures met requests that were often made by mmr negotiators. 5. Ante Markovi¢, remarks to usyec luncheon meeting in New York, Oct. 10, 1989. 6. Ante Markovi¢, address to Yugoslav Federal Assembly, Dec 18, 1989. 7. Richard Johnson, ‘‘Status of Yugoslav Reform Program” (report to usyEc members), Oct. 6, 1989. 8. Ibid. 9. Ibid. 10. Jeffrey Sachs and David Lipton, ‘How Yugoslavia Can Save Itself,” Washington Post, Dec. 31, 1989. 11. Report of the Serbian president’s “‘Commission for Social Reforms,” July, 1989. 12. New York Times, Jan. 24, 1990. 13. Director of Central Intelligence William Webster to Senate Armed Ser- vices Committee, Jan. 23, 1990. 14. Ambassador Warren Zimmerman to joint meeting of U.S.-Yugoslav Eco- nomic Council and Yugoslav Chamber of Economy, Cavtat, Yugoslavia, May 29, 1989. Roya loytol oy Primary Sources and Select Bibliography This volume draws on a variety of primary sources: archival holdings in the United States, statistical volumes in both Yugoslavia and the United States, and, especially in Chapters 5 and 6, on a series of interviews with bankers, lawyers, businessmen, and government officials in both countries and in several international organizations. These are listed below, as is a selected list of secondary sources consulted. Archival Holdings The National Archives of the United States (NA), Washington, D.C. Harry S. Truman Library, Independence, Missouri Dwight D. Eisenhower Library, Abilene, Kansas L.B.J. Library, Austin, Texas U.S. Department of State, Washington, D.C. (material released under Freedom of Information Act) U.S.-Yugoslav Economic Council Archives, Washington, D.C. Statistical and Other Official Publications Agency for International Development. U.S. Overseas Loans and Grants, Obligations and Loan Authorizations, July 1, 1945—September 30, 1988. Washington, D.C.: GPO, 1989. Amendments to the Constitution of the Socialist Federal Republic of Yugo- slavia, srry Assembly, Federal Chamber, Belgrade, Oct. 22, 1988. International Monetary Fund, International Financial Statistics. Washing- ton, D.C., 1945-. . International Financial Statistics Yearbook. Washington, D.C., 1945-. Law on Foreign Exchange Transactions and the Credit Relations with Foreign Countries. Offical Gazette of Yugoslavia 15. Belgrade, March 1, 1977. Savezni zavod za statistiku [Federal Statistical Office]. Statistika spoljne trgovine SFRJ [Foreign Trade Statistics of Yugoslavia]. Belgrade, 1985. . Yugoslavia, 1945-1985. Belgrade, 1986. U.S. Congress. House. Yugoslav Emergency Relief Assistance. 82nd Cong., 1st sess., House Document No. 112, 1951. 229 230 Select Bibliography U.S. Department of State. Foreign Relations of the United States. 1945-1954. Washington, D.C.: GPO, 1947-86. Interviews with the Authors Russell O. Prickett unless otherwise noted. Yugoslav Bankers, Lawyers, and Business People Bora§, Miroslav. Attorney. Colanovic¢, Branko. Jugobanka (retired). Djurisi¢, Djordje. Attorney. Dozet, Andrea. Genex. Granfil, Toma. Jugobanka (retired). Konte, Boris. Yugoslav National Bank. Kosti¢, Bosko. Investbanka. Mandzuka, Zlatko. Privredna Komora. Milkovié, Dragomir. Investbanka (retired). Mir, Vinko. Ljubljanska Banka. Mladenovié, Olivera. Jugobanka Rivkov, Zoran. Genex. Trbojevic, Zarko. Yugoslav National Bank. Vucié, Borka. Beobanka. Government of Yugoslavia Crnobrnje, Bogdan. Ministry of Foreign Affairs (retired). Crnobrnje, Mihailo. Ministry of Foreign Affairs. (Interviewed also by John R. Lampe). Jelic, Nikola. Ministry of Finance. Kovaé, Oskar. Cabinet (retired). Kovacevic, Cedomir. Ministry of Foreign Economic Relations. Kovaéevic, Zivorad. Ministry of Foreign Affairs (retired). Lonéar, Budimir. Ministry of Foreign Affairs. Mates, Leo. Ministry of Foreign Affairs (retired). (Interviewed also by John R. Lampe). Papi¢c, Augustin. Ministry of Foreign Affairs (retired). Presburger, Josip. Ministry of Foreign Affairs (retired). Radivojevic, Branko. Ministry of Foreign Affairs. Smole, Janko. Ministry of Finance (retired). U.S. Bankers, Lawyers, and Business People Baranetsky, Walter. Morgan Guaranty Trust. Barkas, James. Consultant. Select Bibliography 231 Brainard, Lawrence. Bankers Trust. Breitenbeck, Gregory. United Technologies (Pratt & Whitney). Bricklin, Malcolm. Yugo America (former). Chapman, Peter. United Technologies. Conner, James. Attorney. Dobrich, Fulvio. Manufacturers Hanover Trust (former). Early, Charles. GTE (former). Edelson, Ira. Yugo America (former). Gallagher, Willard. Textron. Greer, Peter. Chase Manhattan Bank. Hitch, James. Attorney. Ives, Stephen. Attorney. Johnson, Richard. U.S.-Yugoslav Economic Council (usysc). Kopta, Nikola. I.D.E. McCarthy, Paul. Chemical Bank (former). McDonnell, James. McDonnell Douglas. Minneman, John. Chase Manhattan Bank. Mudd, Margaret. Manufacturers Hanover Trust. Orenstein, Henry. McDonnell Douglas. Prior, William. Yugo America (former). Raper, Nola. usyEc. Sokolich, Mario. Irving Trust. Sulimirsky, Witold. Irving Trust. Sweatt, Henry. Honeywell. Titus, Vance. Bechtel. Utley, Jack. McDonnell Douglas. Wallace, John. McDonnell Douglas (retired). U.S. Government Aitkim, Peter. Foreign Credit Insurance Association. Albright, Raymond. Eximbank. Anderson, David. Department of State (retired). Campbell, John. Department of State (retired). (Interviewed by John R. Lampe). Coughlin, Susan M. Eximbank. Eagleburger, Lawrence. Department of State. Fleig, Joseph. Eximbank. George, Lloyd. Department of State. (Interviewed also by John R. Lampe). Glazer, Stephen. Eximbank. Huber, John. Eximbank (retired). (Interviewed also by John R. Lampe). Jackson, Geoff. Department of Commerce. Jurjevic, Miomir. Department of State (U.S. Embassy, Belgrade). Katz, David. Department of Commerce. 232 Select Bibliography Keller, Jeremy. Department of Commerce. Lee, Robert Y. Department of Commerce. Lowenstein, James. Department of State (retired). Meissner, Charles. Department of State (former). Mileuseni¢, Evalina. Department of State (U.S. Embassy, Belgrade). Moran, Thomas. Eximbank. Nichols, Patrick. Department of State. (Interviewed also by John R. Lampe). Robins, David. Department of State. Rodriguez, Rita. Eximbank. Scanlan, John. Department of State. (Interviewed also by John R. Lampe). Shapiro, Harvey. Department of Treasury. Weiss, Leonard. Department of State (retired). (Interviewed by John R. Lampe). Zimmerman, Warren. Department of State. International Chaufournier, Roger. World Bank. Farsad, Mansour. World Bank. van Houten, Jan. mmr. Junz, Helen. mr. Kaps, Franz. World Bank. Lari, Eugenio. World Bank. Nouvel, Philippe. World Bank. Qureshi, Moeen. World Bank. Ripley, Duncan. Ir. Russo, Massimo. IMF. Schou-Kjeldsen, Igor. Frankfurt businessman. Stern, Ernest. World Bank. Thalwitz, Wilfred. World Bank. Wappenhaus, W. A. World Bank. Whittome, L. Allen. mer. Selected Secondary Sources Adamovicé, Ljubi8a S. ‘‘The Foreign Trade System of Yugoslavia.” In Radmila Stojanovi¢, ed., The Functioning of the Yugoslav Economy. Armonk, N.Y.: M. E. Sharp, 1982. Artisian, Patrick F. R. Joint Ventures in Yugoslav Industry. Gower, Vt.: Gower Publishing Co., 1985. Babi¢, Mate, and Emil Primorac. ‘‘Some Causes of the Growth of the Yugoslav External Debt.” Soviet Studies, 38 (Jan. 1986): 69-88. Baldwin, David A. Economic Development and American Foreign Policy, 1943-1962. Chicago: University of Chicago Press, 1966. Select Bibliography 233 Bekic, Darko. Jugoslavija u hladnom ratu, odnosi s velikim silama, 1948— 1955 [Yugoslavia in the Cold War, Relations with the Great Powers, 1948— 1955]. Zagreb, 1988. Burger, Willem Gerard Kester, and Guus den Ouden. Self-Management and Investment Control in Yugoslavia. The Hague: Institute of Social Studies, 1977. ; Burlett, John. “Stabilization Measures in Yugoslavia.’’ East European Econ- omies: Slow Growth in the 1980s, III. Joint Economic Committee of the U.S. Congress. Washington, D.C.: GPO, 1986. Colanovié, Branko. Dugovi Jugoslavije [Yugoslavia’s Debts]. Novi Sad, 1985. Conner, James C., and Branko Vukmir. ‘“‘The Legal Anatomy of a Yugoslav ‘Enterprise.’’’ The Business Lawyer 32, no. 1 (November 1976): 99-117. Dedijer, Vladimir. The Battle Stalin Lost. New York: Grosset & Dunlap, 1972. Gligorov, Kiro. “The Social and Economic Basis of Socialist Self-Management in Yugoslavia.’”’ In Radmila Stojanovic, ed., The Functioning of the Yu- goslav Economy. Armonk, N.Y.: M. E. Sharp, 1982. Gnjatovic, Dragana. Uloga inostranih sredstava u privrednom razvoju Ju- goslavije [The Role of Foreign Resources in the Economic Development of Yugoslavia]. Belgrade, 1985. Heuser, Beatrice. Western Containment Policies in the Cold War: The Yugoslav Case, 1948-1953. London: Routledge, 1989. Horvat, Branko. The Yugoslav Economic System. Armonk, N.Y.: M. E. Sharp, 1976. Horsefield, J. K., ed. The International Monetary Fund, 1945-1965. 2 vols. Washington, D.C.: mr, 1969. Jackson, Marvin R., and John R. Lampe. “The Evidence of Industrial Growth in Southeastern Europe before the First World War.” East European Quarterly 16, no. 4 (1983): 385-415. Jovanovié¢, Jadranka. Jugoslavija u ujedinjenim nacijama, 1945-1953 [Yugo- slavia in the United Nations, 1945-1953]. Belgrade, 1985. Kaufman, Burton I. Trade and Aid: Eisenhower’s Foreign Economic Policy, 1953-1961. Baltimore, Md.: Johns Hopkins University Press, 1982. Killen, Linda. ‘‘Ekonomski interesi SAD u Jugoslavija izmedzu dva svetska rata’ [Economic Interests of the U.S. in Yugoslavia between the Two World Wars]. Istorija 20 veka 1—2 (1986): 43-66. Lampe, John R., and Marvin R. Jackson. Balkan Economic History, 1550— 1950: From Imperial Borderlands to Developing Nations. Bloomington: Indiana University Press, 1982. Larson, David L. United States Foreign Policy Toward Yugoslavia, 1943— 1963. Washington, D.C.: University Press of America, 1979. Lees, Lorraine M. ‘“‘The United States and Yugoslavia, 1948-1958: The Diplomatic Record.’’ Conference Papers, East European Program, Wood- row Wilson International Center for Scholars, Washington, D.C. Lydall, Harold. Yugoslavia in Crisis. Oxford: Clarendon Press, 1989. 234 Select Bibliography . Yugoslav Socialism: Theory and Practice. Oxford: Clarendon Press, 1984. Markovich, Stephen C. ‘‘American Foreign Aid and Yugoslav International Policies.” East European Quarterly 9, no. 2 (1975): 185-93. Mason, Edward S., and Robert E. Asher. The World Bank since Bretton Woods. Washington, D.C.: Brookings Institution, 1973. Mates, Leo. Medjunarodni odnosi socialisti¢ke Jugoslavije [The International Relations of Socialist Yugoslavia]. Belgrade, 1976. Mladek, J. V., E. Sturc, and M. R. Wyczalkowski. “‘The Change in the Yugoslav Economic System.” IMF Staff Papers. Washington: IMF, 1952. Moore, John H. Growth with Self-Management: Yugoslav Industrialization, 1952-1975. Stanford, Calif.: Hoover Institution Press, 1980. Mugoé§a, Dragica. ‘‘Sjedinjene Americke Drzave i Jugoslovenski 1948” [The USA and Yugoslavia, 1948]. Istorija 20. veka 1, no. 2 (1983): 59-89. Nichols, Patrick J. ‘‘Western Investment in Eastern Europe: The Yugoslav Example.” The Economics of Eastern Europe. U.S. Congress, Joint Eco- nomic Committee. Washington, D.C.: GPO, 1974. Oliver, Robert W. International Economic Cooperation and the World Bank. New York: Holmes and Meier, 1975. Pastor, Robert. Congress and the Politics of U.S. Foreign Economic Policy, 1929-1976. Berkeley: University of California Press, 1980. Petranovi¢, Branko. Revolucija i contrarevolucija [Revolution and Counter- revolution] Vol. 2. Belgrade, 1980. . Politiéka i ekonomska osnova narodne vlasti u Jugoslaviji za vreme obnova [The Political and Economic Basis of the Popular Regime in Yugoslavia during the Recovery]. Belgrade, 1969. Petrovich, Michael B. “The Independent American Military Mission and Yugoslav-American Relations, 1944-1945.” In Thomas Hammond, ed. The Anatomy of Communist Take-Overs. New Haven, Conn.: Yale University Press, 1975. Plan, Roland. External Debt Rescheduling. Vienna: Manzsche Verlag, 1985. Pollard, Robert A. Economic Security and the Origins of the Cold War, 1945— 1960. New York: Columbia University Press, 1985. “Relations between Yugoslavia and the United States of America.”’ Yugoslav Survey 1 and 2 (1988): 105-60. Rusinow, Dennison. The Yugoslav Experiment, 1948-1974. Berkeley: Uni- versity of California Press, 1977. . “Yugoslavia’s Enduring Crisis and Delayed Reforms.” Pressures for Reform in the East European Economies. U.S. Congress, Joint Economic Committee. Washington, D.C.: GPO, 1989. Sachs, Stephen R. Self-Management and Efficiency: Large Corporations in Yugoslavia. London: Allen & Unwin, 1983. Sesije Centralnog Komiteta SKJ, 1948-1952. Belgrade, 1985. Sretnovic, Milo’. Ekonomski odnosi Jugoslavije sa inostranstvom [Eco- Select Bibliography 235 nomic Relations of Yugoslavia with Foreign Countries]. Pristina, 1968. Stefan, Charles G. ‘“‘The Emergence of the Soviet-Yugoslav Break: A Personal View from the Belgrade Embassy.” Diplomatic History 6, no. 4 (Winter, 1982): 387-404. Sukijasovi¢, Miodrag, and Djura Vujacic. Industrial Cooperation and Joint Investment Ventures Between Yugoslav and Foreign Firms. Belgrade, 1968. Tyson, Laura D’Andrea. ‘“‘Yugoslav Economic Performance in the 1980s: Alternative Scenarios.’’ East European Economies: Slow Growth in the 1980s. Washington, D.C.: GPO, 1986. , and Gabriel Eichler. Continuity and Change in the Yugoslav Economy in the 1970s and 1980s. East European Countries Studies 1980. U.S. Congress, Joint Economic Committee. Washington, D.C.: GPO, 1981. U.S.-Yugoslav Economic Council. Business News. 1975-. Vucinich, Wayne S., ed. “‘At the Brink of War and Peace: The Tito-Stalin Split in Historical Perspective.’ East European Monograph CXXIV. New York: Columbia University Press, 1982. Woodbridge, George. UNRRA. 2 vols. New York: Columbia University Press, 1950. World Bank. Yugoslavia: Development with Decentralization. Baltimore, Md.: Johns Hopkins University Press, 1975. . Yugoslavia: Adjustment Policies and Development Perspectives. Washington, D.C.: World Bank, 1983. Yugoslavia and the World Bank. Belgrade: World Bank, 1985. Index Acheson, Dean, 24, 31, 33 Adenauer, Konrad, 57 Agency for International Development (aip), 11, 60, 63, 111, 116 Agricultural Aid and Assistance Act of 1954. See Public Law (PL) 480 Agricultural Bank, 89, 90, 91, 92, 117 Agricultural exports, U.S., 11, 31, 41, 49, 53, 54 Agriculture, U.S. Department of, 53 Agriculture, Yugoslav: collectivization, 29, 32, 53; collectivization aban- doned, 40, 43; droughts, 29, 32, 34, 40; improvement, 64; neglect of, 77, 79, 151, 192, 206; production, 5, 64, 65, 188 Agrocoop, Novi Sad, 132, 137 Aid, U.S., to Yugoslavia, 2, 3, 8, 13, 29-31, 41, 66, 70, 71, 105, 190, 193, 204; emergency (1949-53), 29, 47, 111, 190; impact of Yugoslav bal- ance of payments and national in- come, 69, 76, 192-93, 204; military, 11, 31; policy conflict, 10; political considerations, 29, 192-93, 206; ter- mination of, 66-69, 193; through UNRRA, 21, 23, 38, 70. See also Tri- partite agreement Airbus, 121 Allen, George V., 31, 32, 38, 39, 40, 47 Allen, Richard, 34, 44 American Embassy (Belgrade), 19, 20, 26, 29, 50, 51, 52, 54, 63, 91, 133 (ta- ble 5.2 note), 158-59, 211 n.14, 223 nn.31—32, 224 n.40, 224 n.44, 224 n.55, 225 n.62, 226 n.73; “cross- roads cable,’’ 160 American Farm Bureau Federation, 53 Anderson, David, 160, 161, 166, 172, 180, 184, 224 n.44, 224n.55, 225 n.62 Armco Steel, 128, 131 Associated Bank of Croatia (uBH), 92 Austerity measures, 142, 160, 171, 181, 189, 201 Australia, 54 Austria-Hungary, 4, 5, 6 Autarky, 74, 75, 79, 89, 101 Avia wines, 122 Balance of payments, Yugoslav: on current account, 41, 98, 189, 191, 217 n.44; deficits, 29—30, 38, 40-42, 44, 49-51, 64-65, 96, 148—49, 158, 164-65, 171, 173, 178, 191, 201, 203; development deficit, 97, 118; separate republic accounts, 95; sur- pluses, 97, 178, 180, 188; and U.S. aid, 41, 69 Banco D’Ambrosiano, 222 n.24 Bankers Trust, 167 Bank for Cooperatives, 224 n.53 Bank for International Settlements (BIs), 3, 170; bridging loans, 176-77, 187 Banking, Yugoslav, 89; complexity, 157; foreign investment allowed, 196; laws, 142, 152, 184; regulation, 83, 106, 152-53, 198; reorganization (1990), 197, 198. See also Economic reform Bank of America, 45, 167 Bankruptcy Code, U.S., 89, 124 Bankruptcy laws, Yugoslav, 87, 226 Zoi 238 Index Bankruptcy laws, Yugoslav (Cont.) n.82; enforcement procedures, 197, 203 Banks: Canadian, 157; German, 157; Italian, 157; U.S., 3, 148, 155, 157, 192 Banks, Yugoslav, 87, 93, 149; ambig- uous role of, 89, 152—53; associated, 91, 153; Associated Bank of Croatia (UBH), 92; Beobanka (uss), 91, 92, 175, 198; as ‘cash windows”’ of founding enterprises, 153; commer- cial, 89, 90, 153; interwar, 7, 16, 17; Investbanka (Yugoslav Investment Bank), 89, 90, 91, 92, 153, 154; In- vestment Bank of Titograd (iBT), 91; Jugobanka (Bank for Foreign Trade), 89, 90, 91, 153, 175, 184, 224 n.55; Kosovska Banka, 91; Ljubljanska Banka, 91, 175, 222 n.19; National Bank of Yugoslavia (NBy), 28, 46, 83, 89), 90; 91) 1165 1175 1525 565159" 165, 167, 176, 198, 218 n.33, 220 n.11, 224 n.42; Poljobanka (Yugo- slav Agricultural Bank), 89, 90, 91, 92, 117; Privredna Banka (pBz), 92, 153, 154, 156, 159, 221 n.12; Sara- jevska Banka, 91, 175; specialized, 89, 90, 91, 150, 218 n.33; Stopanska Banka Skopje, 91; Vojvodjanska Banka, 91; Zagrebacka Banka, 175 Beethoven’s Ninth Symphony, ix Belgrade Declaration (1955), 57 Bell/irr, 128, 131 Beobanka (uss), 91, 92, 175, 198 Beogradski Graficke Zavod, 125 Berlin Wall, ix, 205 “Bern governments,” 175, 176, 178— 79. See also Friends of Yugoslavia Bicani¢, Rudolph, 24 Big Mac. See McDonald’s Bihaé, Bosnia, 142 Bishop Graphics, 142 Black, Eugene, 11, 37, 63 Black and Decker, 128, 131, 135 Blair loans, See Foreign loans to Yugo- slavia Blaw-Knox Corp., 111 BOAL (Basic Organization of Associated Labor), 93, 150, 203 Boeing Aircraft Co., 119-21, 194 Bondholders: American, 36; French, 36, 40; U.S. Foreign Bondholders Council, 36, 37; Western, 63 Bor copper mines, 115 Bosnia-Hercegovina, 5 Boycotts of Yugoslav products, 108 Brazilian debts, 157, 166 Bretton Woods conference (1994), 24, 27 Bricklin, Malcolm, 123 Bridging loans. See Bank for Interna- tional Settlements (sis) British Aviation, Ltd., 119 Bruce, David, 40 Bulaji¢, Milan, 145 Bulgaria: Communist leadership de- posed, 200 Bundesbank, West German, 161 Burns, Arthur, 161 Buttes Gas and Oil Corp., 131, 135 Byrnes, James, 19 C-47 shooting incidents (1946), 19, 24, 211 n.14 Cabot, John Moors, 26 Canada, 54 Cannon, Cavendish, 26, 29, 31 CARE, 33, 38, 55 Carrier Corp., 128, 131 Castro regime, 67 Chamber of Economy, 130, 144-47 Chamber for Promotion of Economic Cooperation with the United States. See Chamber of Economy Chase Manhattan Bank, 45, 90, 128, 167, 177, 222 n.18 Chemical Bank, 158, 168, 222 n.18 Chemtex Fibres, 128, 131. See also Hemteks Chetniks, 17, 18, 19 Chevron Oil Co., 131, 135 Chrysler countertrade arrangements, 16. See also Countertrade Churchill, Winston, 18 Citibank, 159, 164, 168—69, 177, 222 n.18 Civil aviation agreements, 101 Clayton, William, 23, 24, 28 cMEA (Council for Mutual Economic Assistance), 162, 206 Coca-Cola Co., 121-22 Combustion Engineering, 133, 141 COMECON. See CMEA Cominform: Yugoslavia expelled from, 74, 205 Commerce, U.S. Department of, 15, 30, 105, 107, 108, 144 Commodity Credit Corporation (ccc), 53, 117, 161, 175, 184, 193, 224 n.53, 224 n.55 Communist parties: leaderships ousted from governments, 200; renounce monopolies of power, ix, 200, 204-5 Communists. See League of Commu- nists Comparative advantage, 82, 84 Comparative costs, 78, 79, 89 Competition: as aim of 1960s reforms, 82, 85, 86; among forms of business ownership, 196 Conditionality for credits, 51, 52 Consolidation period. See Resched- uling debt Constitution, Yugoslav: 1946, 20; 1971 amendments, 87, 150; 1974, 87-88, 92-95, 150, 152, 198, 201; 1988 amendments, 196; 1990 proposed amendments, 198; ‘‘little constitu- tion” (see Law on Associated La- bor) Continental Trade Services, 142 Convertibility. See Dinar, Yugoslav Cooperatives, 196; permitted (see En- terprises, Yugoslav: law on) Cornell School of Hotel Management, 106 Counterpart funds. See Public Law (PL) 480 Countertrade, 106, 118-23, 194 Court of Associated Labor, 93 Couve de Murville, Maurice, 40. See also Tripartite agreement Credit guarantees: bank, 90, 91, 156, 218 n.33, 221 n.12; government, 90, 156, 173, 224 n.55; “‘sovereign risk” Index 239 versus “commercial risk,’ 173—74, 222 n.20 Creditors, 155, 160, 164; bank, 164, 166, 167, 169—70, 178, 182, 185, 186-88, 195, 221 n.11, 227 n.4; gov- ernment, 164, 166, 170, 174-76, 178-79, 182, 186, 188, 189, 195, 227 n.4. See also Friends of Yugoslavia; International Coordinating Commit- tee (1cc); Paris Club Credit policy, Yugoslav, 83, 87, 106, 171-72, 187, 203 Credits to Yugoslavia: British, 52; Ital- ian, 52; Western, 30, 51, 195; West German, 49, 52. See also Tripartite agreement Croatia, 6, 7, 222 n.19; Croatia- Slavonia, 5; unrest in, 91, 150, 221 n.4 (see also Political tensions) Croatia, Associated Bank of (uBH), 92 | Crvena Zastava (Kragujevac), 123, 124. See also Yugo automobile Cuban missile crisis, 58, 67 Currency reform. See Economic reform Czechoslovakia: Communist leader- ship deposed, 200; Soviet repression (1968), 108 Dalmatia, 5 Danube Conference, 30 Debt, Yugoslav. See Foreign debt, Yu- goslav Decentralization: economic, 2, 30, 43, 44, 46, 74, 75, 88, 92, 95, 148-53, 201, 203; financial, 92, 94, 152-53, 203; of foreign trade, 95; political, 74, 92, 95, 150-53, 201, 203 Delarosiere, Jacques, 161, 165-66 Dent, Frederick B., 144 Depression of 1930s, 4 Development Loan Fund (ptF), 11, 56, 59-64, 65, 111, 193 Dillon, Douglas, 65 DINA, 130, 131, 134, 140, 141, 151, 154, 192, 222 n.18 Dinar, Yugoslav: convertibility as goal, 83; convertibility attained (1990), 197; devaluations, 36, 43, 65, 83, 171, 172—73, 184, 186, 203, 217 240 Index Dinar, Yugoslav (Cont.) n.17; exchange rates, 8, 36, 83, 171, 180, 185, 187, 197; multiple ex- change rates, 44, 65; nonconvertible, 85, 95, 99; stabilization (1925), 8 Dirksen, Everett McK., 66 Djilas, Milovan, 20, 58, 79, 80 Djuro Djakovié, 111 DOKI, 130, 131, 133-34, 141, 222 n.18 Dome Petroleum (Canada), 222 n.24 Donovan, William, 18 Douglas Aircraft Co. See McDonnell- Douglas Corporation Dow Chemical Co., 128, 130, 131, 133— 34, 141, 154, 192 Dozet, Andrea, 121, 219 n.15 Dragan, Zvone, 145, 163, 172, 174 Drysdale Securities, 222 n.24 Dubrovnik meetings: of usyec and Yu- goslav Chamber of Economy, 145, 146, 159, 225 n.63, 227 n.14 Dulles, John Foster, 25, 57, 62; meeting with Tito (1955), 57, 68 Eagleburger, Lawrence S., 158, 160, 161, 163, 223 n.27 Eastern Europe: development funds for, 207; political/economic change, 142, 199, 203, 206 East Germany, 57; Communist leader- ship deposed, 200; Yugoslav diplo- matic recognition of, 57 (see also Hallstein doctrine) Eaton Corporation, 125, 128, 131 Economic boom of 1960s, 86, 87 Economic Cooperation Administration (cca), 10, 32, 33, 34, 35, 39 Economic crisis, Yugoslav (1980s), 74, 92, 191-92 Economic growth, Yugoslav, 74, 76, 190; extensive, 74, 75, 78, 81; inten- sive, 74, 75, 78, 82; rapid, 74, 76, 78, 148-49, 155, 190; stagnation in 1980s, 142; upturn in 1984, 181 Economic planning, Yugoslav, 80, 149; “indicative,” 149 Economic policy, Yugoslav: egalitaria- nism, 75; macroeconomic, 87, 171— 72, 180-87, 201, 203; policy coun- cil, 45 Economic reform, Yugoslav, 3, 30, 43, 47, 189-90, 200; 1960s reforms, 74, 75, 81, 82, 86—88, 105, 150, 191, 194, 200; 1980s reforms, 143, 146, 188-89, 191, 195; incomplete, 87, 190-91, 194, 200, 203, 206; lessons for Eastern Europe, 191, 200, 201-4; Markovic program (1989-90), 196— 98, 200, 202; retention of American advisers, 198, 202 EI Nis, 132, 136 Eisenhower, Dwight D., 54, 61; admin- istration, 9, 11, 47, 53, 56, 58, 60, 62, 65 Emigration, Yugoslav, to United States, 5,6 Enterprise directors, 79, 87, 150; expe- rience with U.S. and Western busi- ness, 204 Enterprises, Yugoslav, 43, 74-75, 80— 82, 115, 118, 216 n.12; constitu- tional amendments legitimizing var- ious forms, 196, 226 n.3; efficiency of, 191, 192, 201, 203; law on, 143, 196, 226 n.3; mergers, 88, 89, 94, 95, 203; securities issued by (1989), 197-98 Epstein Engineering, 142 Ethnic tensions. See Political tensions Eurodollars, 12 European Investment Bank (E18), 11, 155 European Payments Union (Epu), 35 European Recovery Program (ERP), 10, 24, 27, 28, 32, 35, 71, 72; Soviet re- fusal, 28 Exchange Stabilization Fund (gsr), 161 Eximbank (Export-Import Bank of U.S.); 11); 116524, 34, 32533; seqoue 52, 54, 71, 72, 90, 91, 105, 107, 110— 15, 116, 1117, 119; 139; 161) 178; 180, 184-85, 193, 207, 218 n.33, 219 n.9, 225 n.63 Exports, U.S., to Yugoslavia: agri- cultural, 11, 31, 41, 49; cotton, 31, 32; financed by Eximbank, 110-15; licenses and controls, 30, 105; oil rigs and steel mill, 30. See also Commodity Credit Corporation; Countertrade; Eximbank; Public Law (PL) 480 Exports, Yugoslav: invisible exports, 100, 101, 102, 188, 219 n.42 Fairless, Benjamin, 62 FcIA (Foreign Credit Insurance Associa- tion, U.S.), 184 Federal Assembly, Yugoslav, 173—74, 185, 188, 196 Federal Economic Chamber. See Chamber of Economy Federal Executive Council (FEc), 89, 130, 172, 174, 176, 182 Federal Planning Agency, 149 Federal Planning Institute, 129 Federal Reserve Bank, U.S., 25, 27, 128 Feni ferronickel plant, 138-40, 151, 222 n.18 Fiat (Fiéa), 123. See also Crvena Zastava; Yugo automobile Finance Ministry, Yugoslav, 174, 182 Financial scandals, international, 157 Financial support ‘‘packages”’ for Yu- goslavia, 65, 149, 160—89 passim, 192, 223 n.33, 224 n.34; 1983, 170; 1984, 178, 180; 1985, 183-84; 1986, 185-86; 1987, 187; 1988, 187-88 Findley, Paul, 69 First National Bank of Chicago, 198 Fiscal policy, 184, 187 Fisher, Adrian, 33 “Five-legged horse,’ 70, 174 Five-year plans: 1947-51, 20, 26, 29, 44, 77, 79; 1961-65, 65; 1976—80, 151-52 Floating exchange rates, 12 Florijancié, Joze, 173 Food crises, Yugoslav, 29, 32, 38, 40 Food for peace. See Public Law (PL) 480 Ford Motor Company, 26 Foreign Affairs Ministry, Yugoslav, 182 Foreign aid to Yugoslavia, 44. See also Aid, U.S., to Yugoslavia; Tripartite agreement Index 241 Foreign Assistance Act of 1963, U.S., 68, 71 Foreign credit. See Foreign debt, Yugo- slav Foreign debt, Yugoslav: 1920-30, 7, 14, 15; 1950s, 50, 51; 1960s, 149, 215 n.27, 221 n.2; 1970s,148—59, 195, 221 n.2; 1980s, x, 3, 75, 96, 140, 142, 145-46, 148-89 passim, 194-95, 206; danger of default, 160, 162, 164, 189, 195; payments “‘front- loaded,” 223 n.31; repayment of principal, 182, 185, 187; service ra- tio, 189, 222 n.22; structure, 155-56; swap arrangements, 189, 197. See also Creditors; Rescheduling foreign debt Foreign exchange: accounts, 219 n.44; allocation, 83, 96; dealings, 95—96, 151-52; legislation, 185, 197; liber- alization, 105, 146, 187; market, 83, 188; regulations (interwar), 17; re- serves, 166, 180, 188—89, 195; reten- tion quotas, 43, 83, 125 Foreign investment in Yugoslavia: 1920s—1930s, 7, 14, 16; 1967 legisla- tion, 8, 84-85, 105-6, 124-25, 128— 29, 194, 196, 217 n.21, 220 n.29, 220 n.32; 1978 amendments, 129-30; 1984 liberalization, 140-41; 1988 re- form legislation, 142-43, 146, 196; attitudes, 45, 84, 124—25, 130, 141, 201; banking opened to, 197; consti- tutional amendments, 196; encour- agement, 84—85, 124—25, 127-29, 140-41, 143, 196; equity ownership allowed, 196, 203. See also Joint ventures, U.S.-Yugoslav Foreign loans to Yugoslavia: Blair loans (U.S.), 14, 63, 210 n.1; French loans to Serbia (pre-1914), 4; inter- national, 65; League of Nations, 8; oil import, 156, 159; syndicated, 146, 156, 159, 164, 169, 223 n.29; U.S. bank loans, 45, 156; U.S. offi- cial loans, 71, 72 Foreign Operations Administration, 57. See also Agency for Interna- tional Development 242 Index Foreign trade, U.S.: as percent of Gnp, 9; policy, 9, 10, 16, 108 Foreign trade, Yugoslav: balance, 98, 188, 189; on clearing accounts, 16, 99, 116, 162, 175; with Czechoslo- vakia, 23; with Eastern Europe, 98— 100, 102; geographic distribution, 97-100; growth and composition, 8, 96, 97, 99; interwar, 6; with Iraq, 99; with Italy, 15, 16, 48, 49, 52, 99, 102; legislation, 185; with Nazi Ger- many, 16; as “necessary evil,’’ 79; as percent of csp, 97; with Soviet Union, 23, 99, 102, 162; with United States, 6, 8, 14, 15, 42, 44, 96, 99, 102-4, 190, 193; with Western Eu- rope, 47, 98-100 Foreign trade bank. See Jugobanka Fortune, 146 Fotic, Konstantin, 18 Friends of Yugoslavia, 163, 167, 174— 76, 182—83, 185—86, 187, 188, 225 n.66, 226 n.78; list of countries, 223 n.33 Fulbright, William: exchange program, 59, 69 General Agreement on Tariffs and Trade (GaTT), 9, 10; Yugoslav inter- est and accession, 48, 65, 67, 83, 84, 105, 107 General Electric Co., 144 General Foods, 132, 137 General Investment Fund (cir), 90, 150, 218 nn.29—30. See also Indus- trialization: investment in Generalized scheme of preferences, U.S. (csp), 108-9, 146, 194 General Motors, 111, 121, 132, 135— 36 Genex (General Export), 115, 116, 121, 122, 132, 138, 194, 219 n.15, 220 n.16 Germany. See East Germany; West Ger- many Girard International Bank, 128 Global Motors. See Yugo automobile Gillette, 128, 129, 131 Glasnost, 200 Gold: standard (1931), 8; Yugoslav re- serves, 23, 25, 176-77 Goodrich, 132, 136, 141 Gorbachev, Mikhail, 200 Granfil, Toma, 145 Greece: civil war, 19, 27; UNRRA sup- plies to, 22; U.S. aid to, 27 Gross social product (csp), 76, 188; de- fined, 76 (table 4.1, note); stagna- tion, 191. See also National product, Yugoslav Grosuplje, Slovenia, 135 GTE, 132, 136—37 Guarantees, credit. See Credit guaran- tees Habsburg lands, 5 Hallstein Doctrine, 57 Hammer, Armand, 122-23 Hardison, Walker, 142 Harriman, W. Averell, 29 Hemteks, 126—27 Hess, Theodore, 118 Hohl, Alfred, 172, 180 Honeywell, 132, 136—37 Huber, John, 225 n.63 Hull, Cordell, 16, 23 Humphrey, George, 62 Hungary, 3, 4, 24, 195; Communist leadership deposed, 199; debt, 162, 195; economic stabilization, 207; uprising (1956), 57 Hurlbert, Gordon, 139 Hyatt Hotel (New Belgrade), 198 IBM, 45 iBT (Investment Bank of Titograd), 90 Impex Overseas, 116, 219 n.15. See also Genex Imports, Yugoslav: liberalization, 84, 105, 187, 196, 203; licensing regime, 83, 84, 105, 217 n.19; restrictions, 142, 159; substitution for, 96, 221 n.1 INA (Industrija Nafte), 122, 130, 132— 35, 141, 154, 192, 222 n.18 Incomes policy, 87, 185, 186, 187 Independence, Yugoslav, 162, 206; se- curity interest in, 161, 193, 206, 223 n.32; U.S. support for, 50, 189, 193, 202, 205 Industrial democracy. See Workers’ self-management Industrialization, 74, 81, 97, 155; in- discriminate, 44, 50-51, 81, 149, 151, 154, 192, 206; investment in, 44, 50, 77, 148-51, 154-55, 218 n.29; key projects, 42, 214 n.55 Industry: interwar, 6, 7; modern facili- ties, 204, 207; pre-1914 Slovenian, Croatian, and Serbian compared, 209 n.3; production, 188; structural changes (1947-84), 77; U.S. contri- bution to, 3, 112, 114, 115, 155, 204, 214 n.55 Inex (Interexport), 118—20, 121, 194 Inflation, 171, 178, 184-89, 191, 195, 201, 203; hyperinflation (1989), 192; stopped, 198 Interest rates, 171-72, 184-87, 203 International Automatic Electric Co., 25 International Bank for Reconstruction and Development (IBRD). See World Bank International Cooperation Administra- tion (Ica), 60, 111. See also Agency for International Development International Development Association (iba), 63 International Finance Corporation (IFc), 127. See also World Bank International Flavors and Fragrances, 128, 131 International Coordinating Committee (icc), 167, 169, 178, 182, 187-88, 22 Aer International Harvester Co., 107, 222 n.24 International Investment Corporation for Yugoslavia (ucy), 127-28, 133 (table 5.2, note) International Monetary Fund (impr), 3, 12, 35-36, 43, 51, 65, 107, 157-73 passim, 179-84, 186, 189, 193, 195, 208 n.16; 1979 standby, 165; 1983 standby, 170—72, 195; 1984 standby, 178, 180-81, 225 n.65; 1985 Index 243 standby, 187-88; 1990 standby, 189, 227 n.4; conditionality (performance criteria), 170—72, 180—82, 184, 188, 195, 206, 225 n.65, 225 n.68; criti- cism, 181, 225 n.70; ‘‘enhanced monitoring” (Article IV), 182, 225 n.71; oil facility, 154-55, 159, 222 n.16 International Telephone and Telegraph (ITT), 17 Intersilver, 129, 131 Investbanka, 89, 90, 91, 92, 153, 154 Investment, foreign. See Foreign in- vestment in Yugoslavia Investment, U.S. See U.S. investment in Yugoslavia Investment Bank of Titograd (iBT), 90 Investment Bank of Yugoslavia. See In- vestbanka Invisible exports, 100—102, 188, 219 n.42 Iskra (Slovenia), 125 Isolationism, U.S., 9, 24 Israel, 2 Italy, 15, 16 jaT (Jugoslovenski Aerotransport), 119, 194 John Deere, 107, 117-18 Johnson, Louis, 30, 31 Johnson, Lyndon B., 108, 128; admin- istration, 47 Johnson, Richard E., 145-46, 221 n.39 Joint stock companies, 196; permitted (see Enterprises, Yugoslav: law on Joint ventures, U.S.-Yugoslav, 106, 125-38, 140-44, 146, 190, 194-95, 203; listed, 131-33. See also Foreign investment in Yugoslavia Josef Krag chocolate factory, 46 Jugobanka (Bank for Foreign Trade), 89-91, 153, 175, 184, 224 n.55 Jugoexport, 116-17, 121, 194 Jugolat, Novi Sad, 87 Jugopetrol, Kotor, 131, 135 Kardelj, Edvard, 19, 31, 79, 80 Kennan, George F., 28, 29, 65, 67 244 Index Khrushchev, Nikita, 57, 58 Kidric, Boris, 43, 45, 79 Kennedy, John F., 65, 67, 68, 105, 128, 193; administration, 11, 47, 59, 62, 64; assassination, 68; invited to visit Yugoslavia, 68; “Kennedy” diesel locomotives, 60, 111, 121; trade ne- gotiations, 10, 67; visit to Tito (1951), 65 Klemen¢ié, Vlado, 178, 224 n.55 Knapic, 125, 131 Knowland, William, 62 Korean War, 11, 27, 61 Kosanovic¢, Sava, 37 Kosovo: lignite-fired power plant, 60, 151; political unrest in, 199 Kosovska Banka, 90 Kovaéevi¢é, Cedomir, 146 Kovacevié, Zivorad, 146 Kredit-Anstalt bank failure, 8 Krsko nuclear power plant, 104, 138— 39, 151, 154, 222 n.19 Kuwait, 223 n.33, 225 n.66; Bank of, AU a}5 AU7A7/ La Guardia, Fiorello, 22, 23 Law on Associated Labor (1976), 93, 94 League of Communists, 58, 88, 172, 173; purges (1971-72), 150; renun- ciation of leadership role, 204—5 League of Nations: loan, 8; sanctions against Italy, 16 Lehman, Herbert, 22 Lend-Lease aid, 17 Leutwiler, Fritz, 176 LIBOR (London Inter-bank Offered Rate), 179, 184, 188 Limited liability firms, 195; permitted (see Enterprises, Yugoslav: law on Livnica, Kikinda, 132, 135-36 Ljubljanska Banka, 91, 175, 222 n.19 Loans, foreign. See Foreign loans to Yugoslavia Lodge, Henry Cabot, 62 Ludviger, Emil, 145 Lurie, William L., 144 McDonald’s, 132, 137-38 McDonell-Douglas Corp., 16, 118-21, 194 McDowell mission to Chetniks, 18 Macedonia, 5, 6; republic of, 140 McKee, Arthur G., 139 Magistrala, 59 Magnohrom, 142 Majdanpek copper mine, 45 Makic, Radovan, 165 Mansfield, Mike, 66 Manufacturers Hanover Trust, 156, 167-68, 177 Marine Midland Bank, 128, 168 Market, Yugoslav: determination of business results, 196; fractured, 92, 192; integrated, 196, 199 Market economy, 2, 3, 43, 73, 74, 82, 85, 106, 143, 172, 190, 196, 207 Market pricing. See Economic re- form Markovié, Ante, 143, 188, 197; gov- ernment, 188, 199; reform program, 196—98, 203, 205; Serbian presi- dency’s reform proposals compared, 199-200 Marshall Plan. See European Recovery Plan Marx, Karl: Das Capital, 79 Mates, Leo, 39, 57, 59 Meissner, Charles, 160, 166 Mergers of Yugoslav enterprises, 88, 89, 94, 203; forced, 94, 95 Mexican debts, 157, 166 Mihailovi¢, Draza, 18, 19, 20 Mikron, 129, 131 Mikulic¢, Branko, 185; government, 188, 195 Milikan, Max, 62, 63 Military aid, U.S. to Yugoslavia (Map), 40, 58, 61, 67, 71—72; sales, 66; training, 66 Military mission, U.S. (Maac), 19, 20, 40, 210 n.14 Mills, Wilbur, 67 Minchev (finance minister), 65 MINEL, 132, 140 Mir, Vinko, 175 Monetary policy, 83, 171, 185, 186, 192, 201, 203; National Bank role strengthened, 198 Montenegro, 4; hydroelectric power plant, 60 Morgan Guaranty Trust, 222 n.18 Moscow Narodny Bank of London, 177 Most-favored-nation (mrn) tariff treat- ment, U.S., 9, 105—7; threatened de- nial to Yugoslavia, 64, 66-69 Muenchner Schroeder Bank (Ger- many), 222 n.25 Multiparty system: advocated by Yugo- slav League of Communists, 205. See also Political liberalization and reform Multi-year refinancing arrangement (MyRA). See Rescheduling foreign debt Murphy, Robert, 57 Mutual Defense Assistance: Act (mpaAa, 1949), 27; Program (mpap), 33, 40 Mutual Security Act (msa), 10, 11, 35, 39, 40, 41, 53, 65, 70 Narodni front. See People’s Front Nasser, Gamal Abdel, 2 National Bank of Yugoslavia (NBy), 27, 45, 33, 89-91, 116-17, 152, 156, 159, 165, 167, 176, 198, 218 n.33, 221 n.11, 224 n.42 Nationalization: law of 1946, 20; U.S. claims, 23, 25, 27, 69 National product, Yugoslav, 44; growth rates (1984—85), 76, 216 n.2; impact of U.S. aid, 69. See also Gross social product (csp) National Security Council, U.S., 36, 54 Nato (North Atlantic Treaty Organi- zation), 27, 166—67 Nazi Germany, 7, 16, 17, 18 Negative gold pledges, 176, 225 n.59. See also Gold Nehru, Jawaharlal, 2 New Idea Farm Machinery Co., 107 Newly industrializing countries (Nic), 74 New York Chamber of Commerce and Industry, 145 Index 245 Nixon, Richard M., 10, 66; administra- tion, 12 Nonaligned movement, 2, 48; Belgrade conference (1961), 66; Yugoslavia’s position in, 166 Noninterference in internal affairs: Belgrade Declaration (1955), 57; U.S. policy toward Yugoslavia, 29; Yugoslav policy principle, 48, 57 Novi Sad Agricultural Fair, 107 Nuclear power. See Krsko nuclear power plant Obrovac alumina plant, 151 Occidental Petroleum Co., 122-23 oecp (Organization for Economic Co- operation and Development), 28, 35, 107 ocEEC (Organization for European Eco- nomic Cooperation). See o£cD Offset purchasing. See Countertrade Oil credits, 154, 155, 159, 222 n.16, 222 n.18. See also International Monetary Fund Oil shock (1970s), 75, 99, 151, 154-55, 221 n.14. See also Petrodollars oxi (Zagreb), 130, 131, 133-34, 141 opec (Organization of Petroleum Ex- porting Countries), 12, 155 opic (Overseas Private Investment Cor- poration), 129 Orenstein, Henry, 120, 121 oss (Office of Strategic Services), 18 Ottoman Empire, 4 Overflights, American, 19, 20, 211 n.14. See also C-47 shooting inci- dents Panéevo fertilizer plant, 60, 111, 115 Papic, Augustin, 218 n.30 Pari passu covenants, 177, 225 n.59 Paris Club, 166—67, 179, 185-86, 189, 195, 224 n.37, 226 n.78, 227 n.4 Parity among creditors, 169 Partisans, 1, 17, 18, 19, 21 Partnerships, 196; permitted (see En- terprises, Yugoslav: law on) Patent and copyright laws, Yugoslav, 146 246 Index Patterson, Richard C., 19, 24, 26 pBz. See Privredna Banka Zagreb Peat, Marwick, Mitchell & Co., 224 n.42 Penn Square Bank (Oklahoma), 222 n.24 People’s Front (Narodni front), 20 Perestroika, 200 Petrodollars, 12, 87, 148, 154, 195, 221 n.14 Philadelphia International Investment Corporation, 128 Planinc, Milka, 160, 165, 171, 174, 185, 224 n.40 Planning, Yugoslav, 90, 150; central planning abolished, 149, 150; Fed- eral Planning Agency, 149; Federal Planning Institute, 129; indicative planning, 149. See also Five-year plans Poehl, Karl-Otto, 161 Poland, 3, 4, 158, 192, 195, 200; debt default, 157, 162, 166, 224 n.53; de- nied most-favored-nation treatment, 67; market-based economic reforms, 200, 202, 207; solidarity movement, 158, 200 Policy Planning Staff, 28, 62, 65 Political interference in economy, 88, 89, 106, 201; local interference, 87, 88, 94, 151, 153, 201, 203, 218 n.25 Political liberalization and reform: in Eastern Europe, ix, 75, 143, 190-91, 193, 200, 204—5; in Soviet Union, ix, 75, 143, 190—91, 200, 204—5; in Yu- goslavia, ix, 86, 188, 191, 196, 200, 204-5 Political tensions, 86—87, 91, 143, 150, 188, 190, 199, 202, 207, 221 n.4. See also Croatia; Kosovo Poljobanka (Agricultural Bank), 89-92, 117 Popovic, Vladimir, 37, 50 Post cereals, 132, 137 Prebisch, Raul, 108 Presidency, Yugoslav, 172, 176 Price controls, 127, 134, 136, 142, 171, 180, 222 n.19; decontrol, 171, 172, 180, 184, 187, 196 Printing Developments International (pp1), 125, 131 Private entrepreneurships, 196; and hiring, 226 n.3. See also Enterprises, Yugoslav: law on Private sector, 81; equal treatment with socialist sector, 196 Privatization, 197 Privredna Banka Zagreb (pz), 92, 153, 154, 156; 159). 227) mal Progres, 132, 133, 137, 194 Project loans, 156 Prokupac, 137 Protectionism, U.S., 9 Proxmire amendment, 66 Prvo Petoletka, 121 Public Law (PL) 480, 11, 34, 35, 53-59, 70, 71, 106, 116—17, 192-93, 214 n.9; Title I, 34, 35, 53-59, 64, 65, 66, 68, 70, 71, 103, 105; Title II, 55, 56, 68, 70, 71; Title III, 55, 56, 68, 117; Title IV, 55, 56, 68, 104, 105; dinar proceeds (counterpart funds), 59, 106, 110, 117; Findley amendment (1966), 69; Yugoslavia exemption from sales ban, 56, 66, 67 Reciprocal Trade Agreements Act (1934), 9 Reconstruction, postwar: European, 24; Yugoslav, 20, 21 Red Army, 17 Reform: economic (see Economic re- form, Yugoslav); political (see Politi- cal liberalization and reform); Serbian presidency’s proposals for (1989), 199-200 Regional tensions. See Political ten- sions Rescheduling foreign debt, 157, 159, 164—89 passim; avoiding the word “rescheduling,” 224 n.40; long-term financing, 189; multi-year refinanc- ing arrangement (Myra), 182-84, 186, 226 n.73, 226 n.77; pledge not to reschedule, 166; serial reschedul- ing, 183-84, 186. See also Creditors Reparations, WWI: Hoover moratorium (1932), 15; Yugoslav claims, 25 Republic Investment Funds (rir), 150. See also Industrialization: invest- ment in Retention quotas, 43, 83, 125 Riddleberger, James, 57, 58 Rijeka, 26, 33, 118 Rikanovié, Svetozar, 186, 226 n.82 Road to socialism. See Workers’ self- management Rogers, James G., 36 Romania, 24, 158; Communist leader- ship deposed, 200; debt default, 162, 166; negotiations with mmr, 157 Roosevelt, Franklin D., 18; administra- tion, 16 Rosen, Martin, 39 Rostow, Walt W., 61, 62 Rudi Cajavec, 125 Rusk, Dean, 67 Sarajevo Winter Olympics, 101 Sarajevska Banka, 90, 174 Savings, Yugoslav, 76, 81, 151 Séepanéevic, Djordje, 88 Scientific and Technical Cooperation: International Agreement on, 110; Joint Fund for, 110; Joint U.S.- Yugoslav board for, 110 Schiller’s “Ode to Joy,” ix Securities, Yugoslav, 197-98 Security interest in Yugoslavia, 161, 193, 206, 223 n.32 Security Pacific Bank, 168 Self-managed enterprises. See Workers’ self-management Self-management agreement (sma), 93 Serbia, pre-1914: foreign trade, 4, 6; French loans to, 4; treaty of com- merce with U.S. (1881), 2, 6, 68 Sergeichuk, Mikhail, 22 Serial rescheduling, 183-84, 186 Shell Oil Corp., 46 Singer Sewing Machine Co., 45 Sirotkovié, Jakov, 143 Sisak steel pipe mill, 60, 111, 115 Skopje earthquake (1963), 34, 59, 68 Slavijaelectra, 142 Slovenia, 5, 6, 7, 208 n.3, 222 n.19 Slovin winery, 122 Index 247 Smederevo complex, 151, 220 n.27 Smoot-Hawley tariff (1930), 9, 15 Social compacts, 92, 93 Socialism, Yugoslav. See Workers’ self-management Social ownership, 81 Socony-Vacuum, 16, 17, 24, 46 Soko Mostar, 121 Solidarity movement, 158 Solomon, Anthony, 128 Sovereignty, 171, 173-74 Soviet bloc, Yugoslavia and, 13, 31, 162, 193, 205-6 Soviet Union: economic offensive of, 61, 215 n.19; embargo (1948), 2, 29, 74, 79, 115; military threat of, 40, 61, 191, 205, 206; and nuclear test- ing, 66; political/economic change in, 143, 200, 201, 205; refusal of Western aid, 28; U.S. relations with, 20, 205 Soviet-Yugoslav joint companies, 26, 31 Soviet-Yugoslav relations, 2, 17, 23, 48, 57, 58, 59; Belgrade declaration (1955), 57; conflict, 36; Moscow declaration (1957), 57; ‘‘second dis- pute,’ 58; trade agreement (1961), 66; U.S. NSC analysis of, 36 Special Drawing Rights (spr), 12 Spiljak, Mika, 122 Stabilization measures, 171—72, 180, 189 Stalin, Josef, 13, 29, 115; split with LON Xe ste B O44. 79, 205 Standard Oil of New York, 16, 17, 24, 46 Standstill of debt payments, 168, 180 Stassen, Harold E., 57 State Department, U.S., 14, 25, 28, 32, 33, 40, 50, 51, 52, 54, 67, 68, 111, 158, 161, 163, 166-67, 219 n.14, 221 n.14, 223 n.32 State socialism, 80 State trading, 83 Steel, 7; Sisak mill, 60, 111; Smederevo complex, 151, 220 n.27 Stepinac, Archbishop, 34 248 Index Stock exchanges, 197 Stopanska Banka Skopje, 90 Structural Adjustment Loans (sat), 170, 174—75, 188. See also World Bank Student protests, 86, 87 Subsidies, 79, 87, 201 Sudaviation, 119 SUNFED (Specialized un Fund for Eco- nomic Development), 62 “Super goodwill clause,” 183, 185 Swiss National Bank, 168, 176 Switzerland, 167 Tang, 132, 137 Tariffs, Yugoslav, 65, 82, 84, 105; rates (1965), 84; reduced (1989), 196. See also Economic reform, Yugoslav; Imports, Yugoslav: liberalization Tax reform legislation, 198, 220 n.26; turnover tax proposed (1989), 198 Taylor, Harry, 178 Technology transfer, 121, 124, 127, 146 Tempo, Svetozar Vukmanovié, 45, 54, 55 Texaco, 131, 135 Tigar, Pirot, 132, 136 Time-Life, 125 Third World countries, 2, 11, 48, 61 Tito, Josip Broz, 2, 17, 18, 19, 21, 26, 28, 30, 40, 43, 51, 55, 58, 62, 67, 68, 80, 105, 107, 150, 190, 193, 211 n.14, 221 n.4; foreign policy, 48, 57; government, 39, 50, 66; ‘‘keeping Tito afloat,” 40, 47, 193; post-Tito Yugoslavia, 160, 190; split with Sta- lin (1948), x, 1, 5, 13, 25, 27, 28, 29, 44, 79, 205; talks with U.S. leaders, 2, 28, 31, 37, 57, 144; visit to U.S., 57, 68, 105 TOUREX 67 exhibition, 107 Tourism, Yugoslav, 101; receipts from, 164, 188 Tower, John, 66 Trade exhibitions, U.S., in Yugoslavia, 107 Trade Expansion Act (1962), 10, 67, 105 Trade missions, U.S., to Yugoslavia, 107-8, 219 n.5 Trade negotiations: Kennedy round, 10, 105; Tokyo round, 10 Trade Reform Act (1974), 10, 194 Trading companies, Yugoslav, 96, 115-17, 119-21, 122, 138, 150, 194, 219 n.12 Treasury, U.S. Department of, 117, 129, 158, 166, 183 Treaty of Friendship, Commerce, and Navigation (1881, U.S. and Serbia), 2, 6, 68 Trepéa lead and zinc mines, 22, 115 Trieste, 18, 19, 24; settlement (1954), 52 Tripartite agreement (1951-54, U.S., U.K., and France), 38, 39, 41; end of, 49, 50, 51. See also Balance of pay- ments, Yugoslav Truman, Harry S., 31, 32, 40; adminis- tration, 10, 33, 205; Truman Doc- trine, 27 Tupolev (USSR) aircraft, 119 Turkey, U.S. aid to, 27 uBH (Udruzena Banka Hrvatske), 92 Udruzena Banka Beograd (Beobanka, UBB), 91, 92,153,154 Udruzena Banka Hrvatske (uBH), 92 Unemployment, 189, 192 Uniroyal Goodrich, 132, 136, 141 United Nations: Conference on Trade and Development (uNcTaD), 48, 108; Relief and Rehabilitation Adminis- tration (UNRRA), 21, 22, 23, 24, 26, 29, 39, 71; technical assistance pro- gram, 61 United States investment in Yugosla- via (interwar), 14, 15, 16, 190, 210 n.2, 211 n.8 United States-Yugoslav Economic Council (usyeEc), 133 (table 5.2, note), 144-47, 159, 221 n.39, 225 n.63 U.S. Steel, 62 UstaSa, 19 Velebit, Vladimir, 211 n.14 Vietnam, War, 2, 111 Vojvodina, 5 Vojvodjanska Banka, 91 Wallace, John, 119 Wall Street Journal, 163 Warsaw Pact, 205 Weinberger, Caspar, 161 West Germany: break with Yugoslavia, 57; credits to Yugoslavia, 49, 52 Westinghouse, 138-39, 194 Whittome, L. Allen, 165-68, 170, 172, 224 n.41, 224 n.44 Wilson, Woodrow, 4 Workers abroad, Yugoslav, 86, 96, 101, 217 n.21; remittances from, 164, 188 Workers’ councils, 43, 79, 80, 88, 94, 125, 126, 216 n.12; and Marx’s “‘free association,” 79 Workers’ self-management, 43, 74, 75, 79, 80, 82, 84, 125, 191; law on, 80, 82, 88 World Bank (1Brp), 3, 8, 9, 11, 24, 27, Index 249 32, 35, 36, 37, 38, 39, 44, 51, 60, 61, 63, 64, 107, 117, 127, 155, 159, 169, 170, 173, 174, 175, 178, 188, 193, 222 n.21, 227 n.4 Yugo America, Inc., 123-24 Yugo automobile, 104, 122—24 Yugoslav Airlines, 119, 194 Yugoslav-American Electric Co., 17 Yugoslav army, 22 Yugoslav Embassy (Washington, D.C.), 27 Yugoslav Emergency Relief Act (1950), 32 Yugoslavia Consolidation Group. See Friends of Yugoslavia Yugoslav National Railway, 111 Zagrebacka Banka, 175 Zagreb Trade Fair, 107, 117 Zimmerman, Warren, 205, 207 About the Authors John R. Lampe is Professor of History at the University of Maryland and from 1986 to 1990 was Secretary of the East European Program of the Woodrow Wilson International Center for Scholars in Washington, D.C. While a member of the U.S. Foreign Service from 1964 to 1967, he served as an economics officer in Belgrade, Yugoslavia, and Sofia, Bulgaria. He is the author of The Bulgarian Economy in the Twentieth Century (New York, 1986) and numerous articles, and the coauthor, with Marvin R. Jackson, of Balkan Economic History, 1550-1950: From Imperial Border- lands to Developing Nations, which was awarded the 1982 Vucinich Prize by the American Association for the Advancement of Slavic Studies. Russell O. Prickett, a graduate of the Harvard Law School, joined the U.S. Foreign Service in 1959 and served as commercial attaché in Bel- grade, Yugoslavia, from 1964 to 1968, and chief of the American Em- © bassy’s economic section in Belgrade from 1982 to 1985. Since retiring from the diplomatic service he has been a consultant to private interna- tional business and a member of the board of directors of the U.S.- Yugoslav Economic Council, Washington, D.C. Ljubiga S. Adamovic has been Professor of Economics at the Univer- sity of Belgrade since 1967 and Chairman of the Department of Interna- tional Economics since 1971. Since 1973 he has also been Professor of Economics and member of the Joint Yugoslav-American Advisory Coun- cil at Florida State University, and Visiting Professor of Economics at Lehigh University, Skidmore College, and the Johns Hopkins University Bologna Center, and Colgate University. His books include Economics of the Policy of Nonalignment (Belgrade, 1983) and Yugoslavia and the International Environment (Belgrade, 1983). He has served as special advisor to the Yugoslav Federal Secretariat for Foreign Affairs and has represented Yugoslavia at many international meetings, including the COMECON Commission for Scientific and Technical Research and the European Common Market. He lives in Belgrade, Yugoslavia. Library of Congress Cataloging-in-Publication Data Lampe, John R. Yugoslav-American economic relations since World War II / John R. Lampe, Russell O. Prickett, LjubiSa S. Adamovic. jo, art Includes bibliographical references and index. ISBN 0-8223-1061-9 1. Yugoslavia—Foreign economic relations—United States. 2. United States—Foreign economic relations—Yugoslavia. 3. Reconstruction (1939-1951)—Yugoslavia. I. Prickett, Russell O. II. Adamovié, Ljubiga S. III. Title. HF1578.5.z5u65 1990 337.497073—dc20 90-38619 CIP —— ge - 5 eae ae ee a ee oe as ity Libraries iii | D0078 1292T DUKE UNIVERSITY LIBRARY DURHAM, NORTH CAROLINA 27706 I