Introduction: The Pragmatic Pattern of Yugoslav-American Relations

____Yugoslav-American relations since the Tito-Stalin split have been pragmatic and positive for the most part, despite enduring ideological differences between the two governments. The emergence of a common 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, political 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 repeatedly 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 American governments to reappraise their political relations. Suddenly they shared a common adversary, perhaps the most compelling of reasons for diplomatic rapprochement. By the mid-1950s Yugoslavia had reestablished 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 Yugoslav 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 economic 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 countries. 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 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 Americans to study or to visit each other's countries without Soviet-style restrictions.

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 contribution. These private American trade ventures and investment projects, bolstered by several official programs, brought Western business practices 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 Yugoslav borrowing plunged the country into a debt crisis in the early 1980s. The U.S. government, private banks, and three major international financial organizations—the International Monetary Fund (IMF), the World Bank, and the Bank for International Settlements (BIS)—all played important roles in helping Yugoslavia avoid default on its international financial 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 background. One is the pattern and potential of Yugoslav economic growth before this long postwar period. This dimension includes the earlier 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 overseas 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 sympathy 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 developed European economies, however, did expand to modern proportions. 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 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 commercial 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 constituting 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 legislation in 1923. Perhaps 100,000 Serbs had also entered by World War I. 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 Yugoslavia, 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 depression. 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 twice the prewar total. Another less recognized result was a stalemate over state economic policy. The central bank in Belgrade and the powerful private institutions in Croatia and Slovenia avoided each other, as did the respective sets of cooperative agricultural banks. Regional disagreement 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 Czechoslovakia) 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 encouraged 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 manufactured 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.