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Historical Background

Adherence to the Soviet model after World War II meant that foreign trade was controlled entirely by the state, contact with the Western industrialized countries was kept to a minimum, and domestic resources were used as much as possible in the process of industrial development. Therefore, exports were viewed merely as a device for obtaining essential imports, and many items were manufactured within the country although they could have been imported much more cheaply. In 1948 foreign trade amounted to less than 10 percent of Yugoslav Gross National Product ( GNP--see Glossary). Most trade activity was bilateral commodity exchange with other socialist countries. Over two-thirds of pre-World War II Yugoslav foreign trade had been with Western Europe, but by 1948 over 50 percent of imports and exports involved Cominform countries.

Immediately following Yugoslavia's expulsion from Cominform in 1948, trade with socialist countries dropped to zero. This sudden change meant that between 1948 and 1950 the total value of Yugoslav exports fell by nearly 50 percent, and imports by 25 percent. Yugoslavia was forced to turn to the Western industrialized nations to obtain capital equipment, fuel, and raw materials for the intense industrial development called for in the first two five-year plans. Throughout the 1950s, United States and West European credits and grants were vital in sustaining industrial growth in Yugoslavia.

As early as 1961, new foreign exchange and foreign trade policies stressed liberalization and decentralization. The driving motivation of the reform of 1965 was to bring Yugoslavia into the world market. This meant removal of foreign trade barriers and open economic competition with foreign enterprises. Theoretically, those developments would spur greater efficiency in the domestic market and make Yugoslav goods more competitive on the world market. As a result, Yugoslavia could sell its competitive goods on the international market and halt production of items that could be imported more cheaply. The domestic market remained under the protection of partial government price support until Yugoslavia could be fully transformed to a market economy and the dinar made convertible to Western currency.

Trade in the 1970s was greatly influenced by Yugoslavia's dependence on oil imports and a worsening balance of payments. Increases in world oil prices in 1973 and 1979 accelerated import costs while export growth was slow. The Fifth Five-Year Plan (1976-80) failed to transfer emphasis to technologically advanced industries able to replace imports and expand exports. Balance of payments constraints slowed domestic activity in 1972, in 1975- 76, and in 1979-81. In addition, the world recession at the end of the 1970s caused net interest payments on foreign debts to increase considerably, net receipts from Yugoslavs working abroad to decline, and foreign lenders to withdraw.

In 1980 Yugoslavia owed over US$18 billion to Western creditors. Because the only way to shift the debt was to increase exports, the slogan adopted for trade policy in the 1980s was "Export by Any Means." Exports accelerated, and prices for them dropped. By 1986 the Yugoslav trade deficit with the European Economic Community ( EEC--see Glossary) had dropped to US$1 billion from its 1980 level of US$4 billion. But this drop was more a function of decreased non-oil imports, required to conserve hard currency reserves, than of increased exports (see table 15, Appendix).

Trade with the industrialized West dropped sharply in the mid-1980s, from a 55.6 percent share in 1978 to 43.3 percent in 1984. During this period, debt owed to Western Europe reached 60 percent of the total Yugoslav debt. In response, a piecemeal policy rescheduled some debt, sought loans from new Western sources, and continued repayment of at least the interest on existing debts.

After massive devaluations in the dinar in 1989, that currency was pegged to the West German deutsche mark (DM--see Glossary) and declared convertible in January 1990. Set at seven to the DM, the dinar was to move parallel with the DM against other Western currencies. This provision allowed citizens as well as enterprises to convert dinars to Western currency upon demand. At the beginning of the 1990s, economists predicted that the value of Yugoslav exports would continue to rise to record levels and the foreign debt would be manageable; in the early stages of the reform, the "new" dinar proved more stable than most economists had expected.

Data as of December 1990

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Yugoslavia Table of Contents