Update 2024-11-19

vwl6/VL_Sozialismus/hausarbeit/paper.md

@@ -14,11 +14,11 @@ link-citations: true
 
 The early 1990s marked a pivotal moment in world history, famously described as the "end of history" by political theorist Francis Fukuyama [@fukuyamaEndHistory1989]. With the collapse of the Soviet Union and the widespread adoption of liberal capitalism, it seemed as though Western democratic capitalism had triumphed as the ultimate and unchallenged form of socio-economic organization. Amidst this global shift, socialism—the greatest socio-political experiment of the 20th century—appeared to be consigned to the past, discredited and dismantled across much of the globe.
 
-Yet, the story of socialism’s demise is not a simple tale of ideological failure; it is intertwined with complex internal and external dynamics. Among the various socialist models, Yugoslav socialism stood out for its unique blend of market mechanisms and worker self-management, presenting an alternative vision of socialism that diverged from the centralized planning of the Soviet model. However, by the 1980s, this once-promising system found itself in deep crisis, ultimately unraveling in the face of insurmountable economic challenges.
+Yet, the story of socialism’s demise is not a simple tale of ideological failure; it is intertwined with complex internal and external dynamics. Among the various socialist models, Yugoslav socialism stood out for its unique blend of market mechanisms and worker self-management, presenting an alternative vision of socialism that diverged from the centralized planning of the Soviet model. However, by the 1980s, this once-promising system found itself in deep crisis, ultimately unraveling in the face of political and economic challenges.
 
 This essay explores the downfall of Yugoslav market socialism, arguing that its collapse cannot be attributed to internal inefficiencies or ideological shortcomings. Instead, it posits that external factors played the decisive role in undermining the Yugoslav economy and bringing the end of its socialist experiment.
 
-The first section provides a brief overview of Yugoslavia's economic history, setting the stage for an analysis of existing explanations for its collapse. Following this, the essay examines four major external shocks that significantly impacted the Yugoslav economy: beginning with the Oil Shock of the 1970s, it then explores the global economic downturn, the escalation of external debt, and concludes with an analysis of the IMF Adjustment Programs.
+The first section provides a brief overview of Yugoslavia's economic history, setting the stage for an analysis of existing explanations for its collapse. Following this, the essay examines four major external shocks that significantly impacted the Yugoslav economy: beginning with the Oil Shock of the 1970s, it then explores the global economic downturn, the escalation of external debt, ebbing of immigration, and concludes with an analysis of the IMF Adjustment Programs.
 
 ## Economic History of Yugoslavia
 
@@ -30,8 +30,6 @@ The Yugoslav economic system was defined by the central role of workers' self-ma
 
 Unlike other socialist economies, Yugoslavia maintained a relatively open stance towards both Eastern and Western trade. As a founding member of the General Agreement on Tariffs and Trade (GATT), it engaged extensively in international trade, particularly from the 1960s onwards. Yugoslavia’s imports and exports were notably diversified, spanning a wide range of trading partners and products.
 
-
-
 ## Existing Explanations
 
 A variety of theories seek to explain the disintegration of the Socialist Federal Republic of Yugoslavia (SFY). @jovicDisintegrationYugoslaviaCritical2001 outlines seven distinct arguments, including economic, cultural, nationalist, and international political factors. My argument straddles the economic and international political explanations, with a primary focus on the collapse of the economic system rather than the disintegration of the state itself.
@@ -48,7 +46,7 @@ In the following sections, I will outline the key external shocks and their over
 
 ## Data
 
-Economic data series for Yugoslavia are notoriously difficult to obtain and often unreliable. Official growth data for the Social Product, Yugoslavia’s equivalent to GDP, are particularly problematic due to price distortions and data fabrication. Therefore, this analysis relies on alternative time series from the Maddison Project Database [@boltMaddisonProjectDatabase2024], which draws on the independent research conducted by the Research Project on National Income in East Central Europe.
+Economic data series for Yugoslavia are notoriously difficult to obtain and often unreliable. Official growth data for the Social Product, Yugoslavia’s equivalent to GDP, are particularly problematic due to price distortions and data fabrication. Therefore, this analysis relies on alternative time series from the Maddison Project Database [@boltMaddisonProjectDatabase2024], which in turn draws on the independent research conducted by the Research Project on National Income in East Central Europe.
 
 Many of the additional data sources used throughout this analysis are drawn from the OECD Economic Surveys [@OECDEconomicSurveys]. These biannual surveys, conducted from 1962 to 1990, provide standardized tables on various economic indicators, including foreign trade, debt, balance of payments, and the federal budget, among others. Some of the data in these reports were sourced directly from Yugoslavia’s Official Statistics Office, while other figures were calculated by OECD researchers. Data from these digitized reports used here has been extracted using OCR (Optical Character Recognition) technology, then transformed into time-series data for further combination and analysis.
 
@@ -57,7 +55,7 @@ Many of the additional data sources used throughout this analysis are drawn from
 
 The oil shocks of 1973 and 1979 marked a turning point in the global economy, as sudden and dramatic increases in oil prices sent shockwaves through oil-dependent nations worldwide. These crises saw global oil prices nearly triple, rising by almost 300%, and profoundly disrupted the economic stability of many countries. For Yugoslavia—a nation without domestic oil production and heavily reliant on imported energy—these shocks presented a formidable challenge that would strain its economic model. 
 
-During this tumultuous period, the impact on Yugoslavia’s economy was stark: the share of energy imports in total imports surged from about 5% in the 1960s to nearly 30% by the early 1980s (see @fig-imports2). Similarly, energy imports as a share of GDP rose sharply, climbing from roughly 1% in the 1960s to almost 15% at the beginning of the 1980s, as visible in @fig-imports1. These shifts underscored the country’s growing vulnerability to external economic forces and contributed to the mounting pressures on its socialist economy.
+During this period, the impact on Yugoslavia’s economy was stark: the share of energy imports in total imports surged from about 5% in the 1960s to nearly 30% by the early 1980s (see @fig-imports2). Similarly, energy imports as a share of GDP rose sharply, climbing from roughly 1% in the 1960s to almost 15% at the beginning of the 1980s, as visible in @fig-imports1. These shifts underscored the country’s growing vulnerability to external economic forces and contributed to the mounting pressures on its socialist economy.
 
 
 ::: {#fig-imports layout-ncol=2}
@@ -100,33 +98,33 @@ Importance of Remittances for Yugoslavia
 
 ### External Debt
 
-In order to address the growing current account deficit that it was experiencing in the 1970s, Yugoslavia sought assistance from Western lenders. In pursuit of promising investment prospects beyond their moribund domestic markets, Western capitalists were amenable to investing in nascent markets such as Yugoslavia [@babicCausesGrowthYugoslav1986]. It is estimated that these lenders covered approximately 90% of Yugoslavia's current account deficit up to 1975 with their loans [@yarashevichEconomicReasonsBreakYugoslavia2013].
+In order to address the growing current account deficit that it was experiencing in the 1970s, Yugoslavia sought assistance from Western lenders. In pursuit of promising investment prospects beyond their flagging domestic markets, Western capitalists were amenable to investing in nascent markets such as Yugoslavia [@babicCausesGrowthYugoslav1986]. It is estimated that these lenders covered approximately 90% of Yugoslavia's current account deficit up to 1975 with their loans [@yarashevichEconomicReasonsBreakYugoslavia2013].
 
-This dependence on Western capital subsequently became a significant liability, particularly in the 1980s. The second oil shock precipitated inflationary pressures in the West, particularly in the United States, where the Federal Reserve responded by raising interest rates to as high as 20% in 1981. The soaring interest rates had a particularly pronounced impact on emerging economies, including Yugoslavia. As a result, they were compelled to pay a considerable premium to finance their debt, while also facing mounting costs associated with its servicing.
+This dependence on Western capital subsequently became a significant liability, particularly in the 1980s. The second oil shock precipitated inflationary pressures in the West, particularly in the United States, where the Federal Reserve responded by raising interest rates to as high as 20% in 1981 (known as the "Volcker shock"). The soaring interest rates had a particularly pronounced impact on emerging economies, including Yugoslavia. As a result, they were compelled to pay a considerable premium to finance their debt, while also facing mounting costs associated with its servicing.
 
 The advent of the Mexican debt crisis in 1982 precipitated a rapid and widespread contraction in the availability of foreign credit for numerous countries. Foreign lenders promptly retreated from emerging markets, seeking safer investments such as US Treasury bonds. During this period, "Yugoslavia completely lost its access to international financial markets" [@mojmirFormerYugoslaviasDebt1996]. This forced the government to seek alternative sources of funding for essential imports, including energy resources that were vital for maintaining the country's economy.
 
-A significant burden on the economy was the debt servicing payments, which reached 10% of GDP in 1980 and reached a record 21.7% in 1986. For any country, such substantial debt payments would represent a significant challenge. However, for Yugoslavia, which was already experiencing a range of economic difficulties, this situation became particularly problematic.
+A significant burden on the economy was the debt servicing payments, which reached 10% of GDP in 1980 and  a record of 21.7% in 1986. For any country, such substantial debt payments would represent a significant challenge. However, for Yugoslavia, which was already experiencing a range of economic difficulties, this situation became particularly problematic.
 
 ![Debt Dynamics](./images/debt.png)
 
 ## The Role of the IMF
 
 In the context of multiple crises, many of which were precipitated by the 1979 oil shock, Yugoslavia was compelled to seek assistance from the West. The balance of payments crisis had reached a point where it could no longer be managed without external assistance.
 
-This situation presented a prime opportunity for the International Monetary Fund (IMF), which was originally established to manage balance of payments crises as a lender of last resort. The IMF offers two primary avenues of assistance to countries facing short-term liquidity challenges. The first is direct lending, providing short- to medium-term loans to address a shortage of hard currencies. The second is the provision of a "seal of approval," indicating that a country is on a trajectory towards a more sustainable financial position, thereby enabling private lenders to resume debt or lending activities [@jensenCrisisConditionsCapital2004]. 
+This situation presented a prime opportunity for the International Monetary Fund (IMF), which was originally established to manage balance of payments crises as a global lender of last resort. The IMF offers two primary avenues of assistance to countries facing short-term liquidity challenges. The first is direct lending, providing short- to medium-term loans to address a shortage of hard currencies. The second is the provision of a "seal of approval," indicating that a country is on a trajectory towards a more sustainable financial position, thereby enabling private lenders to resume debt or lending activities [@jensenCrisisConditionsCapital2004]. 
 
 In order to reach an agreement with the International Monetary Fund (IMF), the country in crisis must implement a program of policies that have been negotiated in secrecy and are designed to address the underlying macroeconomic issues.  During the 1980s, the IMF expanded its role beyond that of mere stabilization to become a leading advocate for market-focused reforms. As the "world's leading promoter of market-liberalizing reforms" [@kentikelenisMakingNeoliberalGlobalization2019], the IMF began to advocate for a more expansive program of economic liberalization and structural adjustments in countries experiencing financial crises.
 
 The International Monetary Fund (IMF) frequently employs a standard procedure to address underlying balance of payments crises. This procedure typically involves reducing aggregate demand, primarily through fiscal cuts, while simultaneously encouraging exports to receive inflows of hard currencies. In theory, these programs should not have a significant impact on GDP growth in the long term. Fiscal cuts should enhance the confidence of investors and households that a significant reduction in future spending is unlikely, thereby fostering a more optimistic growth outlook. This phenomenon is known as "expansionary austerity" [@giavazziCanSevereFiscal1990].
 
-In practice, the effect of these policies is frequently contrary to the stated objective of stimulating growth. The policies introduced by the International Monetary Fund (IMF) have a markedly adverse impact on GDP growth and investment, frequently falling far short of the levels required to address the underlying issues. In the aftermath of this decline, a multitude of unforeseen consequences emerge in the countries affected, including those pertaining to public health [@hoddieShortTermPainLongTerm2014].
+In practice, the effect of these policies is frequently contrary to the stated objective of stimulating growth. The policies introduced by the International Monetary Fund (IMF) have a markedly adverse impact on GDP growth and investment, frequently contracting much stronger than expected and needed for macroeconomic balance. In the aftermath of this decline, a multitude of unforeseen consequences emerge in the countries affected, including those pertaining to public health [@hoddieShortTermPainLongTerm2014].
 
 In the case of Yugoslavia, the reform packages initiated in 1981 concentrated on enhancing price signals to align more closely with international market prices. The implicit assumption of this policy is that economic actors will react in a rational and uniform manner to market economies in adjusting to these price increases. In practice, however, the enterprises in a socialist economy like Yugoslavia do not respond in the same way to incentives and are confronted with different financing circumstances than their capitalist counterparts [@tysonConditionalityAdjustmentHungary1986]. 
 
-This is attributable to the soft-budget constraints under which Yugoslav enterprises operated. An increase in prices within this institutional setting does not result in a pass-through or reduction of production, but rather in an expansion of the budget. In the Yugoslav system, a significant proportion of investment demand was driven by administrative measures concerning the distribution of federal funds. This would have constituted a more accurate policy measure. Given the market-oriented approach of the IMF, these measures were not employed to the extent that was required [@tysonConditionalityAdjustmentHungary1986, p.19]. 
+This is attributable to the soft-budget constraints under which Yugoslav enterprises operated. An increase in prices within this institutional setting does not result in a pass-through or reduction of production, but rather in an expansion of the budget. In the Yugoslav system, a significant proportion of investment demand was driven by administrative measures concerning the distribution of federal funds. This would have constituted a more accurate policy measure, but given the market-oriented approach of the IMF, these measures were not employed to the extent that was required [@tysonConditionalityAdjustmentHungary1986, p.19]. 
 
-Furthermore, the lack of clarity regarding the relationship between demand and monetary measures contributed to an underestimation of the effects. As illustrated in @fig-investment, gross fixed investment declined significantly during the 1980s, not only from the arguably unsustainable levels of 40%+ observed in 1978 but also below the pre-crisis levels of 30%. The lowest point was reached in 1987, with a figure of just 20.1%. This overshoot of demand contraction had long-term consequences for the competitiveness of the Yugoslav economy, reinforcing existing problems.
+Furthermore, the lack of clarity regarding the relationship between demand and monetary measures contributed to an underestimation of the adverse effects. As illustrated in @fig-investment, gross fixed investment declined significantly during the 1980s, not only from the arguably unsustainable levels of 40%+ observed in 1978 but also below the pre-crisis levels of 30%. The lowest point was reached in 1987, with a figure of just 20.1%. This overshoot of demand contraction had long-term consequences for the competitiveness of the Yugoslav economy, reinforcing existing problems.
 
 ![Investment as Share of Social Product](./images/inv_sp.png){#fig-investment}