Inflation and stabilization in Yugoslavia

This paper shows that inflation in Yugoslavia shares common elements with inflation in other highly indebted countries, despite appearances other-wise. These common elements include a large transfer of resources abroad unmatched by an internal adjustment, resulting in a large internal redistribution of real resources through inflation. The author argues that Yugoslavia differs from other countries in that these internal conditions are not transparent. Instead of an open fiscal deficit, there were complex interactions among enterprises, commercial banks, and the central bank, involving, among other things, the absorption and servicing of a large stock of foreign exchange liabilities by the central bank. Events in the second half of 1990 also indicate that, for a stabilization program to succeed in Yugoslavia, there must be much greater political resolve to cope with wage indiscipline and loss-making enterprises than was observed in 1990. And the question remains whether financial discipline can be imposed in the system only at the macroeconomic level and without introducing private ownership of capital. The ultimate question may be whether stabilization can succeed without a comprehensive privatization program.