The IMF, Debt, and the Transformation of Yugoslavia: Who Set the Rules for Exiting the Crisis?

Who set the rules?

Two opposing explanations usually appear in the story of Yugoslavia's debt. The first says: Yugoslavia destroyed its own economy, and the international financial institutions merely tried to rescue it. The second says: The IMF and Western creditors imposed a neoliberal transformation on Yugoslavia and economically dismantled it. The documents show a more complicated picture. Yugoslavia had serious domestic economic problems before the most intensive intervention by foreign creditors. Investment was often too high relative to domestic savings.

The banking system did not separate successful and unsuccessful firms strictly enough. Inflation had existed for years. External debt was growing rapidly. The federation had major problems conducting a common economic policy. But when the country entered 1982 with dangerously low foreign-exchange reserves and without ordinary access to fresh commercial credit, the balance of power changed. A state that must refinance billions of dollars in debt does not negotiate from the same position as a state that can simply refuse financing. From that moment onward, the question was no longer only: What economic policy does Yugoslavia want? It was also: What economic policy must its creditors regard as acceptable if they are to reschedule the debt and provide new financing? That is the core of this article.

The IMF did not arrive only after the crisis exploded

It is important to begin somewhat earlier. Yugoslavia had cooperated with the International Monetary Fund long before the debt crisis of the 1980s. In 1981 it began a three-year stand-by arrangement. According to the IMF's own institutional history, the program was built around further exchange-rate adjustment to preserve external competitiveness, tighter monetary and fiscal policy, and restraint of domestic demand.[1] In 1981, the nominal effective exchange rate of the dinar was reduced by about 23 percent, almost offsetting the difference between Yugoslav and foreign inflation.[1] The program did not appear from nowhere. Yugoslav authorities had already concluded that the previous model could not simply continue. In July 1980 a special Commission for Economic Stabilization was established, later preparing a long-term program of economic stabilization.[2]

So an external institution did not simply appear in Belgrade one morning with the idea that Yugoslavia needed reform. A domestic debate already existed. What was changing rapidly, however, was something else: how much freedom the country still had to choose the pace and content of those reforms. 1982: when the option of saying “no” became much more expensive.

In the previous article, we saw that Yugoslavia entered a balance-of-payments and liquidity crisis in 1982. Commercial banks were reducing new lending. Old debt still had to be repaid. Interest rates were high. Foreign-exchange reserves were dangerously low. American documents from late 1982 estimated that Yugoslavia would need more than $4 billion in external financing in 1983, with roughly $3 billion of principal reportedly falling due in the first half of the year alone.[3] An international financial package began to take shape. It did not involve only the IMF and the World Bank. It involved:

• Western governments,
• the Bank for International Settlements,
• official export-credit agencies,
• commercial banks,
• the IMF,
• the World Bank.

An internal U.S. document from November 1982 was very direct. Financial assistance to Yugoslavia, in the American view, should not simply be a “bail-out.” It should include appropriate conditionality that would encourage domestic fiscal and economic reform.[4] The same document identified areas in which Washington wanted firmer changes: the banking system, the foreign-exchange market, credit policy, wage and price formation, more efficient allocation of resources. These are not later interpretations. They are the words of internal documents from a creditor state.[4]

The IMF became a gateway to other creditors

Here it is necessary to understand the mechanism of a debt crisis. The IMF was not the only, or even the largest, creditor of Yugoslavia. But it had a special function. Its program signaled to other creditors that the country was implementing an agreed stabilization policy. U.S. government documents from the wider global debt crisis describe the IMF as being at the center of a system that defined a basic adjustment program and helped determine additional financing needs.[5] The Paris Club likewise tied official debt rescheduling to an appropriate program and monitoring of economic policy. In the Yugoslav case, commercial and official creditors were also directly connected to monitoring implementation.[6] This means that the relationship between Yugoslavia and the IMF was not confined to an IMF loan.

The Fund became a kind of gatekeeper for broader access to financing. If the program failed, it was not only IMF money that was at risk. Also at risk were: debt rescheduling, new money from commercial banks, government credits, export guarantees, and the confidence of other creditors. That changes the meaning of the word “voluntary.” Yugoslavia formally signed the agreements itself. But the cost of refusal could be the loss of access to financing needed to service existing obligations and maintain basic external liquidity.

The World Bank's first structural loan: money in exchange for change. In June 1983, the World Bank approved Yugoslavia's first Structural Adjustment Loan — SAL I, worth $275 million.[7] This was not an ordinary loan for a power station, road, or factory. It was financing directly linked to a program of economic change. The Bank and the Yugoslav government agreed on an action program in three broad areas:

1. investment planning and allocation of capital,
2. the foreign-exchange system and foreign trade,
3. price policy and enterprise decision-making.[7]

Part of the money was disbursed immediately. A further part was tied to satisfactory progress in implementing the agreed program.[8] The World Bank later stated in its own audit that the program contained 24 monitored conditions or commitments.[7] By mid-1986, according to the Bank's assessment, six had been implemented roughly as agreed, eleven only partially, and most of the remainder had not been implemented.[7] This matters for two reasons. First, conditionality was real. Second, Yugoslavia was not a passive executor that automatically accepted every demand. A large part of the reform agenda was politically constrained, rejected, delayed, or implemented differently.

What were the concrete conditions?

The term “structural reform” can sound abstract. When broken down into individual measures, the story becomes much more concrete. Measures monitored or encouraged by the IMF and World Bank included:

• a more realistic or competitive exchange rate for the dinar,
• higher domestic interest rates and a gradual move toward positive real interest rates,
• reduction of subsidized credit,
• liberalization of the foreign-exchange system,
• gradual import liberalization,
• price liberalization,
• higher energy and railway prices,
• stricter criteria for investment projects,
• limiting support for loss-making enterprises,
• stricter application of bankruptcy rules,
• restrictions on personal-income payments in loss-making enterprises,
• reducing funds used to cover enterprise losses.[7][9]

The World Bank, for example, recorded an agreement to raise interest rates gradually toward positive real levels. In the enterprise sector, measures were designed to prevent banks from automatically keeping effectively insolvent firms alive.[7] Under the 1984 stand-by program, restrictions were also agreed on personal incomes in enterprises making losses, together with a substantial reduction and later elimination of transfers from common reserve funds to such firms.[7] This was directly connected to the principle later known as a harder budget constraint. The enterprise was increasingly expected to bear the consequences of its own performance.

This was not only theory: prices also changed. One of the most sensitive parts of adjustment concerned prices. Yugoslavia had long used administrative setting or control of certain important prices. The World Bank and IMF favored greater use of price signals. SAL I documentation explicitly lists changes in the prices of: electricity, coal, meat, rail transport.[7] The economic idea was understandable: if energy is kept artificially cheap, enterprises and households do not receive a realistic signal about the cost of producing it. But for a person whose real wage was already falling, a higher electricity or transport bill was very concrete. Here the difference between macroeconomic logic and social effect becomes visible. What a program describes as removing a price distortion appears in a household as: a higher bill.

Who proposed the reforms first — Yugoslavia or the World Bank?

This question matters because the answer is: both. And that is precisely why the story cannot honestly be told as a one-way diktat. The Yugoslav Commission for Economic Stabilization had already been established in 1980. Its economists and politicians were themselves debating necessary changes. The Long-Term Program of Economic Stabilization of 1983 was a domestic political document. In its own later audit, the World Bank even acknowledged close cooperation between its economists and the Yugoslav stabilization commission and spoke of a convergence of views about important causes of the crisis.[7] The Yugoslav government formally requested a structural adjustment loan in December 1982.[7]

Therefore the claim: “The World Bank invented reforms from nothing and imposed them on a Yugoslavia in which nobody wanted them” is not supported by the documents. But neither is the opposite claim: “Foreign creditors had no influence on the content and pace of reform.” Once the state needed financing, agreed reforms became conditions for access to money and rescheduling. The domestic debate therefore took place within an increasingly narrow external financial space. Yugoslav authorities also resisted conditionality.

One of the most revealing documents comes from 1986. Yugoslavia was negotiating multi-year debt rescheduling with Western governments. Some official creditors wanted tighter oversight. The idea emerged of a so-called “shadow IMF stand-by” — Yugoslavia would accept full IMF conditionality even without drawing new Fund resources. The U.S. Embassy in Belgrade reported that the Yugoslav government would very likely reject such a demand. Yugoslavia reportedly regarded it as punitive and as an unjustified restriction on its freedom to shape domestic economic policy.[10] This is an important document. It shows that even within the Yugoslav leadership, the relationship with creditors was not seen merely as technical economics. It was also understood as a question of political autonomy.

Western governments had interests of their own

When discussing the IMF and World Bank, it is easy to imagine purely neutral technical institutions separated from state policy. The documents show that Western governments also had their own strategic and financial interests. The United States wanted to prevent a Yugoslav financial collapse. But it also did not want simply to absorb the losses of commercial banks. American memoranda explicitly discussed how the burden should be divided among: governments, private banks, the IMF,

the World Bank, and Yugoslavia.[4] One document states that assistance should be linked to reforms and that Western governments should avoid simply rescuing private banks from their credit risk.[4] This means that the assistance package was simultaneously: a stabilization effort for Yugoslavia, a way of protecting the international financial system, and a negotiation over who would absorb the losses. This is not a conspiracy theory. It is the normal logic of a debt crisis. The debtor wants the largest possible relief. The bank wants its money back. The government wants to prevent wider financial or political instability. Each actor has its own interests.

Rescheduling is not the same as cancellation. Public discussion often confuses two concepts. Debt rescheduling and debt forgiveness. Yugoslavia obtained several reschedulings during the 1980s. This mainly meant moving due obligations into the future and assigning new repayment schedules. It did not mean that the debt simply disappeared. In 1985, official Paris Club creditors, for example, agreed to reschedule approximately 90 percent of certain obligations worth $694 million, with a nine-year repayment period and four years of grace.[11] Commercial banks also concluded multi-year refinancing arrangements for maturities. But monitoring of economic policy remained part of the system. The state therefore gained time. And time was valuable. But it did not come without conditions.

The price of financial discipline: an enterprise must become capable of failing

One of the largest shifts of the 1980s concerned the enterprise itself. In classical Yugoslav logic, a large enterprise was also a social institution. If it failed, more than machinery and a balance sheet were at risk. At risk were: jobs, housing funds, local revenues, scholarships, social standards, and often the future of an entire town. But the logic of reform required a different discipline. If an enterprise could not cover its costs in the long run, it could not be financed forever simply to preserve employment.

Therefore there was increasing emphasis on: bankruptcy rules, restrictions on lending to loss-making firms, restrictions on wage payments in unsuccessful enterprises, demands for real interest rates, accounting rules that would show the financial position of firms more realistically.[7] The economic logic of this shift is clear. Its social logic is radical. A worker raised for decades in a system in which employment security was part of the social contract was now receiving a new message: an enterprise is no longer safe merely because it employs people. That is much more than a technical reform of the balance sheet. It is a change in the meaning of socialism itself. When stabilization reaches wages, it reaches the strike line as well.

In the second half of the 1980s, federal authorities tried more strictly to restrict the growth of personal incomes and link wages to productivity. Between 1986 and 1988 there were repeated attempts at general wage freezes or wage restraint.[12] These measures came during very high inflation. That means a frozen nominal wage is not simply a stable wage. It is a rapidly falling real wage. A major rise in industrial conflict followed. Studies of the labor movement report an increase from around 247 strikes involving 13,507 participants in 1980 to 1,851 strikes involving more than 386,000 participants in 1988.[13] Many of these protests were initially social rather than national.

Workers protested over: wages, delayed payments, inflation, enterprise management, privileges, economic reforms, and the feeling that the cost of the crisis was being shifted downward. This matters for the later story. Before crowds became primarily Serbian, Slovenian, Croatian, or Albanian political crowds, many of them were also protesting as Yugoslav workers.

The IMF was not the only author of market transformation

Toward the end of the 1980s, Yugoslavia was moving increasingly toward a market economy. But this process cannot be attributed to the IMF alone. New enterprise legislation was adopted in 1988. New foreign-investment legislation followed in 1989. At the end of 1989, legislation was adopted that opened the way to the sale or privatization of social capital. The World Bank later wrote that the Enterprise Law of 1989 greatly expanded possible forms of ownership, allowed conversion of socially owned enterprises into mixed enterprises, and facilitated private and foreign capital.[14] The Social Capital Law of December 1989 then created a mechanism for the sale of social capital. Amendments in 1990 allowed the issue of internal and external shares and the partial or complete sale of enterprises.[14]

Employees could purchase internal shares on preferential terms. So privatization in Yugoslavia did not begin only after the country's breakup. The legal transition from social ownership toward clearly defined owners began during the final years of the federation. And it began under the federal Yugoslav authorities.

Ante Marković: a reformer, not merely an executor of external demands

Ante Marković became President of the Federal Executive Council in March 1989. His program was much more market-oriented than earlier Yugoslav economic policy. It is important not to present him simply as an IMF man. Marković and his circle had a political project of their own: stop hyperinflation, create a functioning common Yugoslav market, strengthen enterprise discipline, open the economy, change property relations, and preserve the federation through economic success. Negotiations with the IMF on a new program began in the autumn of 1989 after Marković met IMF Managing Director Michel Camdessus.[15] On 18 December, the federal government presented a comprehensive stabilization program.

A new currency replaced the old one at a ratio of 10,000 to 1. The new dinar was pegged to the German mark. Convertibility was introduced. Wages and part of prices were temporarily frozen. Monetary and fiscal policy were to be sharply tightened.[15] The IMF supported the program with a new stand-by arrangement of approximately $600 million.[15] This was a meeting point between a domestic reform project and external financial support. It is not fair to describe it only as foreign diktat. Nor is it fair to overlook that foreign financial support was tied precisely to this direction of reform.

At first, the program worked

In its first months, the Marković program achieved something very visible. Inflation almost disappeared. The exchange rate stabilized. Foreign-exchange reserves increased. Convertibility of the dinar was something entirely new for citizens. The World Bank later wrote that by mid-June 1990 inflation had been reduced practically to zero, exports were strong, and foreign-exchange reserves had reached approximately $9 billion.[16] That is extremely important. If the program had been nothing more than an obviously senseless package that destroyed the economy from day one, these results would not have appeared.

But stabilization rested on a fragile foundation. A fixed exchange rate requires very strict control over: wages, credit, public spending, and monetary policy. Yugoslavia, however, was a federation in which republics and provinces had their own political interests and were increasingly unwilling to accept decisions from the federal center. Wages were frozen on paper, but the federation could not freeze them in practice.

The wage freeze was one of the key elements of the 1990 program. The IMF's later review is very clear. Wages in the entire social sector were supposed to be frozen for six months. But the federal government failed to prevent republics and provinces from permitting exceptions.[17] Already at the first review, the wage criterion was exceeded. The republics increasingly pursued their own economic policy. The World Bank later also found that toward the end of 1990 the national banks of Serbia, Croatia, and Vojvodina extended credit outside agreed limits.[18] The program therefore began to lose its monetary anchor.

Inflation returned. At this point economics and politics became almost inseparable. The question was no longer only: Was Marković's program economically correct? It became: Did the federal government still possess a state in which a single economic policy could actually be implemented? The World Bank itself acknowledged the failure of the first program.

It is important to examine how the international institutions later assessed their own policy. In its audit of SAL I, the World Bank wrote that in the broadest sense the program did not achieve its objectives.[7] It also judged the package of 24 monitored conditions to have been overly ambitious and unnecessarily complex. The Bank acknowledged that the political difficulties of implementing reform had been underestimated.[7] This is valuable evidence. It means the story need not be framed as: “Yugoslavia rejected perfectly designed reforms.” Even the institution that had shaped them together with Yugoslav counterparts later recognized flaws in the design.

For the second structural program, SAL II in 1990, the World Bank later wrote that Yugoslavia had met or substantially met a number of conditions concerning prices, trade, foreign exchange, banks, and enterprises, but had been unable to maintain stabilization criteria as common political decision-making broke down.[18] There is therefore no single story of either success or failure. There is a process in which: economic crisis, external conditionality, domestic reform, social resistance, and political disintegration became ever more closely intertwined.

Who paid the price of adjustment?

This is the most important question. When an economist speaks of: reducing domestic demand, a real exchange rate, positive interest rates, financial discipline, removing subsidies, bankruptcy law, wage restraint, those are not only numbers. Every measure has a social side. A positive real interest rate means more expensive credit. Harder financial discipline means an enterprise may fail. Reducing subsidies means a higher price or less support. Freezing wages during high inflation means falling real income. Import liberalization means greater competition for domestic firms.

Privatization raises the question of who will become the owner of former social capital. The costs were not distributed evenly. They were felt most by the person whose main source of security had been: a wage, a job, a socially owned enterprise, a subsidized service, and the social system built around work.

Did the IMF break Yugoslavia?

On the basis of the documents reviewed, such a simple conclusion cannot be demonstrated. Yugoslavia already had deep economic and institutional problems before the decisive IMF programs. Domestic economists and politicians themselves demanded many reforms. The Yugoslav government itself requested a World Bank structural loan. Marković's program was also his own political project. But it is equally impossible to claim honestly that international financial institutions were merely passive observers. Financing was linked to conditions. Debt rescheduling was linked to monitoring of economic policy.

Western governments explicitly advocated conditionality in their own documents. The World Bank required concrete institutional and market changes. The IMF monitored wages, credit, the exchange rate, fiscal policy, and monetary policy. When a state cannot finance its external obligations without creditor agreement, formal sovereignty remains. But its actual room for economic maneuver shrinks. That is a more important and better documented conclusion than the slogan that someone from abroad simply “ordered Yugoslavia around.” The major consequence: socialism was changing before the state broke apart.

Perhaps the most important conclusion of the whole story is this: Economically, Yugoslavia in 1990 was no longer the same country as Yugoslavia in 1980. Self-management was losing part of its authority. Enterprise managers were gaining more power. Bankruptcy was becoming a more realistic possibility. Social ownership was beginning to transform into shares and defined ownership stakes. Foreign capital was given wider space. Prices and trade were being liberalized. A convertible currency became a goal and, briefly, a reality. The market transformation therefore did not arrive only after the wars of the 1990s. It began inside the SFRY itself. This is crucial for a question that will become even more important later in the series:

What was actually privatized after the breakup — and who received property that had previously been defined as socially owned? But before we reach privatization, we need to understand the political effect of the economic crisis. A person who is losing purchasing power does not always look for an economics textbook. He or she looks for an explanation. And in the second half of the 1980s, political elites across Yugoslavia increasingly offered an answer in the language of the republic, the nation, and the question: Who is exploiting whom? The series therefore moves from balance sheets and credit agreements into the political sphere. When the worker became a Slovene, a Serb, a Croat, an Albanian…: how the social crisis became a national question