Countries of the World/COUNTRYS.BIN/dp/0413/04138.txt

Text File | 1991-06-25 | 27KB | 424 lines

$Unique_ID{COW04138}
$Pretitle{299}
$Title{Yugoslavia
Chapter 3E.   Banking and Inflation}
$Subtitle{}
$Author{Darrel R. Eglin}
$Affiliation{HQ, Department of the Army}
$Subject{percent
banks
foreign
exports
exchange
1970s
imports
bank
payments
economic}
$Date{1982}
$Log{Beach at Dubrovnik*0413801.scf
}
Country:     Yugoslavia
Book:        Yugoslavia, A Country Study
Author:      Darrel R. Eglin
Affiliation: HQ, Department of the Army
Date:        1982

Chapter 3E.   Banking and Inflation

     In the 1970s the banking system was restructured in response to
deficiencies that emerged in the 1960s. Reforms in the 1960s had been partly
based on the belief that government had intervened excessively in the
allocation of resources, and that such decisions were best left to those most
affected-the workers. By the mid-1960s the federal role in investment
financing was greatly reduced. Self-financing by enterprises proved limited,
however. Banks played an increasing role, channeling household savings to
finance enterprise investments. By 1970 bank financing of total fixed
investments approached one-half, and it was about 48 percent in 1980.

     The reforms in the 1960s did not produce the desired results. Regional
barriers restrained mobility of capital. For political reasons duplications
of factories and facilities continued to be built in each republic. Excess
demand for credit forced banks to ration it. By the early 1970s Yugoslavs saw
the banks as exercising too great an influence although some economists argued
the opposite point-that banks were too liberal in granting credit and not
rigorous enough in evaluating projects, thus contributing to inflation and
questionable investments.

     All during the 1970s measures were introduced affecting the financial
structure. Laws in 1976 and 1977 specifically dealt with the banking system
and credit operations. The National Banks of Yugoslavia along with eight
national banks in the republics and autonomous provinces constituted the
country's central bank (commonly called the National Bank). It had most of the
normal central bank functions, such as currency issue, extension of credit to
banks and governments, and regulation of credit, other banks, and foreign
exchange transactions. It had available various tools, such as reserve
requirements, rediscount facilities, and purchase and sales on the foreign
exchange market. The central bank had little control over interest rates,
however. For major decisions-those affecting republic or province-a consensus
among the nine banks was required.

     Banks were the predominant financial institutions (accounting for about
65 percent of total financial assets in the mid-1970s), although there were
investment loan funds, insurance firms, and savings institutions including the
Post Office Savings Bank, which provided easy access through many branches for
most of the population. A 1977 law formalized a reorganization of banks that
had begun in the early 1970s. Three different categories of banks were
established called internal banks, basic banks, and associated banks. In
mid-1979 there were 160 basic banks and nine associated banks. The number of
internal banks was unknown. In addition the Yugoslav Bank for International
Cooperation was created in the late 1970s to provide a variety of services in
foreign trade, including insurance and export credits for commodities and
overseas construction contracts.

     Internal banks are the financial counterpart of BOALs. One or more BOALs,
enterprises, communities of interest, or other self-management organizations
in the social sector (but not governments) may establish an internal bank to
meet the banking needs of its founders. An internal bank keeps accounts and
makes payments for its founders but may not extend credit. Internal banks
maintain deposits in basic banks to effect transactions beyond the circle of
founders, but deposits are not kept with the central bank and regulations are
minimal. Internal banks were established to handle the greatly increased
transactions and accounts resulting from the division of enterprises into
BOALs so that BOALs would not have to turn to larger banks for services and
credit. Internal banks are the financial decentralization that corresponds to
BOALs on the production side.

     Basic and associated banks perform the usual banking services, including
financing trade and investments. Basic banks are formed by BOALs, internal
banks, enterprises, communities of interest, and other social legal
organizations (except governments). The founders have equal voice in
management of basic banks regardless of the amount of funds contributed, and
they usually have unlimited liability for the bank's obligations. Basic banks
can unite to form an associated bank to handle such large transactions as
major investments and foreign borrowing. In several instances, branches of the
former commercial banks became basic banks that joined to become an associated
bank using the same name it had as a commercial bank. The former branches
operated with considerable autonomy in their locality as basic banks. Although
a few banks operated throughout the country, many remained regional or
smaller in their operations.

     Banks were not formed to make a profit but to perform services, primarily
for the members who retained favored access over non-members. By pooling
resources of self-management associations, banks in theory could provide
liquidity and investments to those in need without an autonomous intermediary.
In fact, however, banks have been more important in channeling household
savings to investments by self-management organizations. Since the mid-1960s
banks have for the most part set interest rates. They have been low and
usually negative in an inflationary situation, particularly in the 1970s when
founders were the main borrowers as well as in control of management. Interest
rates neither reflected the cost of money nor played much of a role in
investment decisions. Banks did not carry out settlement of transactions; a
separate nonfinancial, service agency maintained accounts for banks, making
the necessary entries for payments.

     The trend toward decentralization since the 1960s largely stripped the
federal government of fiscal policy and dismantled other means of controlling
aggregate demand. Monetary policy remained the basic tool. Several economists
believed that the central bank had sufficient means to exert greater control
over expansion of the money supply than were actually used. Part of the
problem lay in the contradictory responsibilities assigned to the central
bank-namely monetary stability and supplying the credit needs of the economy
and government. Credit needs usually took precedence except when the highest
Yugoslav leaders agreed that stabilization was a priority goal. The result was
increasing inflation from 1965 onward.

     Many factors affect the growth and control of inflation besides monetary
policy. The Yugoslav price system has undergone various degrees of
liberalization since the complete control exercised in the late 1940s, but it
has never been wholly free of intervention by various levels of government,
and considerable influence remained in 1980. Since the 1965 reforms an effort
has been made to keep domestic prices close to world market prices, but some
lagged more than others. In the 1970s the principle was established that when
government intervention kept prices too low, that body was responsible for
compensating the producing units. This was one of several measures enacted in
the 1970s to force greater discipline in the economy and reduce the demand for
credit.

     In 1975 a law concerning payments between enterprises was introduced to
control the growth of interenterprise credit that was outside of the banking
system. Inefficient producers or those with cash flow problems often resorted
to nonpayment of obligations to banks and suppliers, which had a snowball
effect, particularly in times of credit contraction. Thr