Socialist growth revisited: insights from Yugoslavia

Beyond the recent past, and beyond the Soviet Union, we know little about the performance of Eastern European economies. This paper fills the knowledge void by analyzing socialist Yugoslavia using a diagnostic tool that identifies the mechanisms that drive economic growth - business cycle accounting. The analysis provides novel findings. During the “Golden Age" of economic growth, total factor productivity became gradually more important in sustaining economic growth. Distorted labour incentives were a major constraint on growth since the mid-1960s, and explain the slowdown of the economy during the 1980s. Socialist growth was primarily handicapped by poor incentives to work, rather than by poor incentives to innovate or to imitate. In an attempt to liberalise the economy, economic power was delegated to the labour-managed firms. These firms were maximising income per worker, which I hypothesise hindered the ability of Yugoslavs to work.