My recent article, published at LINKS to commemorate the anniversary of the founding of socialist Yugoslavia in 1943, has sparked criticism for allegedly being too apologetic. It is true that socialist Yugoslavia was far from a utopia, and its political, economic, and social shortcomings—eloquently critiqued as early as Milovan Djilas’s The New Class published in 1957—are well-documented. However, the purpose of that piece was not to present Yugoslavia as a flawless model but to contrast its visionary and purpose-driven state-building with the contemporary capitalist states that thrive on the notion of “the end of history.” Among the critiques I received was the assertion that my article celebrated a state whose economic model was inherently unsustainable and ineffective, with any perceived successes owed entirely to foreign loans. This article aims to debunk that persistent claim, examining the historical and economic realities of Yugoslavia’s development to provide a more balanced perspective.
A recurring narrative about Yugoslavia’s economy is that its post-war development was fundamentally reliant on foreign debt. However, this claim requires scrutiny, as it oversimplifies the country’s economic trajectory and overlooks significant nuances. A closer examination reveals that Yugoslavia’s reliance on external borrowing was limited to a specific period, and even then, the debt burden was moderate by international standards.
Low debt levels pre-1973
For nearly the first three decades after World War II, Yugoslavia maintained a low level of external debt, equivalent to approximately 20% of its GDP. This figure compares favorably with modern benchmarks, such as the European Union’s debt ceiling of 60%, which is adhered to by only a few countries, such as Germany (62%), while others like France (111%) far exceed it. During this period, Yugoslavia’s economic growth was primarily driven by domestic industrialization and the unique system of worker self-management, supported by moderate foreign borrowing.
The country’s borrowing strategy during this time aligned with sound economic principles: investments funded by external loans were productive, yielding returns higher than the cost of borrowing. These returns were also convertible into foreign currency, ensuring Yugoslavia’s ability to service its debt effectively. Even Marxist economics (Amin, 1974) recognize the importance of access to credit for independent economic development. It is not a sufficient condition, however, because self-centered development, as articulated by Amin and other Marxist economists, involves growth that leverages internal backward and forward linkages and boosts the domestic market. In this respect, Yugoslav economic policy in the first 30 years complied with this condition too, as evidenced by the emergence of industries that were previously unknown in the region, such as car and aircraft production, electronics, and others.
The turning point: 1973–1982
The narrative of Yugoslavia “living on debt” stems largely from the economic difficulties of the 1970s. This period marked a significant departure from the earlier pattern of restrained borrowing due to a combination of external shocks and internal inefficiencies. The 1973 oil crisis, coupled with a global economic slowdown, reduced demand in Western markets, significantly affecting Yugoslavia’s foreign exchange earnings. At the same time, rising global interest rates increased the cost of servicing the country’s existing debt, adding further strain to the economy.
Internally, the 1974 constitutional reforms decentralized economic decision-making to the republics and provinces. While intended to democratize economic governance, this decentralization resulted in uncoordinated and inefficient investment practices. Resources were often allocated to less productive or politically motivated projects, exacerbating the existing economic inefficiencies and undermining the country’s overall development strategy (Horvat, 1985).
As a result, while Yugoslavia’s export levels remained stable, foreign exchange inflows declined. This mismatch significantly strained the country’s ability to service its external debt, even as the debt-to-GDP ratio, which peaked at 32% in 1982, remained moderate compared to many developing and developed nations. The debt service ratio—reflecting the share of foreign exchange earnings allocated to debt repayment—surpassed 25% by the late 1970s, creating unsustainable debt dynamics despite the relatively low overall debt level (Denitch, 1994).
Between 1972 and 1982, Yugoslavia’s external debt increased from $2.4 billion to $20.3 billion, a ninefold jump (Cvikl and Mrak, 1996). This escalation reflected not only the need for additional borrowing but also the growing burden of servicing existing loans amid declining returns from investments.
Debt restructuring and the final decade
In the 1980s, international financial institutions restricted Yugoslavia’s access to new financing, forcing the country into debt restructuring programs under the International Monetary Fund (IMF). These programs imposed austerity measures, curbing domestic demand and reducing fiscal space. By 1991, Yugoslavia managed to reduce its external debt to $15.3 billion, demonstrating that the country actively worked to manage and reduce its liabilities during its final decade.
However, the IMF programs came at a significant social and economic cost. The austerity measures exacerbated unemployment and regional inequalities, deepening political tensions and contributing to the eventual fragmentation of the state (Woodward, 1996).
Origins of the myth in collective memory
The myth of Yugoslavia “living on debt” persists because the period of high indebtedness and the subsequent loss of access to international credit coincided with a severe economic crisis that profoundly affected daily life in the country. This crisis was marked by a sharp decline in industrial production (dropping from 7.8% in the 1960s-80s to 1.4% in 1980-1989), skyrocketing unemployment, rampant inflation (which reached 167% by 1987), and falling living standards as earnings per employee turned negative at 1.5% in the 1980s (World Bank, 1991). While inflation was eventually brought under control by the last federal government under Ante Marković, the structural issues exposed by the debt crisis and compounded by IMF-imposed austerity measures dealt a devastating blow to the economy.
The IMF package precipitated the collapse of much of Yugoslavia’s well-developed heavy industry. Many socially-owned enterprises survived only by withholding wages, leaving over half a million workers unpaid by late 1990. Meanwhile, 600,000 workers had already lost their jobs by September 1990. Worse still, the World Bank identified 2,435 industrial enterprises for liquidation, jeopardizing the livelihoods of another 1.3 million workers—nearly half of the country’s remaining industrial workforce (Chossudovsky, 1997). These measures deepened the economic disintegration, leaving an indelible mark on the collective psyche.
For the people of former Yugoslavia, these traumatic events of the last decade of the country’s existence solidified the perception that the country’s economic challenges stemmed from an unsustainable reliance on foreign debt, overshadowing the preceding decades of balanced growth and restrained borrowing. This emotional legacy continues to frame the narrative of Yugoslavia’s economic history both domestically and internationally.