Origins of regional divergence: economic growth in socialist Yugoslavia

Relative to western Europe, we know very little about the determinants of economic growth at the regional level within socialist Europe. This is somewhat unusual, given that socialist policy‐makers have put great emphasis on equitable regional development. This article analyses the regional patterns of growth and divergence in socialist Yugoslavia. New estimates of output and inputs are constructed, and an analysis of output growth, factor accumulation, structural modernization, and productivity is provided. Two novel empirical findings are uncovered. The first is that the sources of growth across the regions were fundamentally different. Total factor productivity was a much more important source of growth in the richer regions than it was in the poorer ones. The second finding is that the source of the regional income divergence lies in the failure of the less developed regions to converge towards the employment rates and total factor productivities of the more developed regions. These failures are interpreted, at least partially, as symptoms of the governing objective and the soft budget constraint of the labour‐managed firms that operated in Yugoslavia. It is argued that Yugoslavia's development model was less suited to the pre‐conditions that prevailed in the less developed parts of the country.