31 August, 2013

Failure of Yugoslavia's Worker Self-management: Kardelj vs. Friedman

A select look into some of the flaws of Yugoslavia's worker self-management enterprises and their failed privatization

There exist few other topics that are still subject of such hard felt emotions and bitterness towards politicians in the countries of the former Yugoslavia as the fact that there are still thousands of factories rotting throughout the region and are being sold off in secret auctions for no more than the mere value of the land they are sitting on. Literally nobody is willing to accept the reality that all that supposed wealth which generations of people built during the previous regime has in the past two decades been meeting this kind of inglorious end. “We already have so many factories, if politicians would only open them for business, we'd all be employed,” people would often say.
To better understand why this ongoing fallacious collectivist wisdom is just a dream, we need to take a hard look at the ground upon which our economic heritage, common to all of the six independent nations, was built on. In 1948, differences between Yugoslavia's dictator Tito and Soviet Union's dictator Stalin had become apparent, resulting in Yugoslavia's expulsion from the Communist Information Bureau (Cominform) and its distancing from the Soviet Union. This split allowed Yugoslavia to freely experiment in its own brand of socialism, independent from the established Marxist-Leninist norms. One of the most important and far reaching experiments that our communist leaders undertook was in the field of economics. Instead of the traditional Soviet model of collective ownership and management of enterprises, Yugoslavia's economic planners (Edvard Kardelj being the chief amongst them) developed and implemented a completely new enterprise system called the worker self management. This economic system has its theoretical roots in 19th century, and was earlier briefly attempted in Spanish Civil War (1936-1939) amongst others.

Unlike the Soviet centrally planned collective ownership model in which enterprises were owned and managed by the state (the communist party apparatchiks), Yugoslavia's worker enterprises, though still owned by the state, were entirely managed by the workers. The way this worked in practice was that workers would choose a workers' committee which would then figure out who the best and brightest amongst the workers were, and put those workers in charge of managing the company.
This worker self-management model showed to be much more productive than the Soviet collective ownership central planning model, because workers were not dictated by the communist party as to what and how they should produce, but instead were free to produce what they thought was best and in the way they believed would bring highest profits that would end up in their own pockets. Many western economists believed that this incentive of workers to work for themselves made the worker enterprises to be a viable alternative to the western free market model. However, the all too-well known disastrous results paint a very different picture about its effectiveness.

Perhaps the first warning that such a model had serious flaws came from an American economist Milton Friedman, who visited Yugoslavia on two occasions together with his economist wife Rose Director Friedman: first in the late fall of 1962, and a decade later in the early spring of 1973, a couple of weeks each time. Having had his own doubts about the effectiveness of Yugoslavia's economic practices, Milton Friedman was very interested and had set out to finding out the details of how it operated. In his conversations with managers of regional central banks and through his visits to various worker enterprises in the country, Friedman soon identified its problems.

That which nobody owns nobody will care for.” - Aristotle

Friedman found out that just like the Soviet model, Yugoslavia's model suffered from an ownership problem. Though workers could keep the profits they generated, the fact that they didn't own these enterprises resulted in their lack of will to invest back into their companies. The reason for this is that if they were to leave their enterprises for some reason, all of their investments that they put back into the company over the years would stay in the business and workers would not have any benefits from it. In other words, they could not take their shares with them. This led to a chronic lack of funding for new projects, innovation, and modernization of the existing capital (tools and machines) and infrastructure.

In their desire to keep workers interested in their companies, managers resorted to nepotism by promising and giving jobs to family members of the existing workers. This way if a worker was to retire or leave the company for any other reason, his or her investment into the business would have not been in vein. This wide spread nepotism led to even more problems for the worker self-management enterprises.

One was the overwhelming excess of employees. Many new workers were often hired under the institutional auspices of their “basic human right to work,” regardless of whether new jobs were economically justified or not. Though those not old enough to remember the days of Yugoslavia can ask their parents and older relatives for confirmation of this practice, it is quite unnecessary as this common phrase is still part of our collectivist wisdom, frequently spoken throughout the countries of former Yugoslavia even today. Few people will accept even a mild suggestion that a job is a privilege awarded by employers to those who deserve it based on merit, and not a right of one's citizenship or even mere existence. Regardless, it is easy to see how this excess of workers leads to even greater problems, such as diluting the profits amongst even greater numbers of workers, thus angering those workers who did not have family member employed by the enterprise.

But the biggest problem for worker self-management enterprises came from the means of how they were funded externally. Due to already being underfunded, because of the self interest of the workers who voted to keep most if not all the profits in their pockets, worker self-management enterprises needed another way to fund and improve their operations externally. Milton Friedman learned from managers of Yugoslavia's regional central banks that the only way for worker enterprises to get external funding was through funds offered by other worker enterprises. In other words, only worker enterprises could loan and borrow money from each others.

This arrangement did not work out well, since for example a textile manufacturing company would in the effort of loaning money to a metal works company suddenly be involved in banking and investing, something neither of the two companies knew much about, nor were willing to gamble their capital on. However, a way in which worker enterprises did manage to get external funding more easily was through Yugoslavia's regional commercial development banks, which also happened to have been worker enterprises. Though these development banks were motivated by the same kinds of incentives and were plagued by the same kinds of problems as all other enterprises mentioned earlier, these banks were often interfered from the regional central governments, and were pressured into providing funds to other manufacturing and service enterprises, regardless of whether their projects were deemed viable or not by the banks. In times when such funds were not available, the government commanded the regional central banks to print out that money and supply it to the regional commercial development banks for further distribution.
In Milton Friedman's view, this kind of unrestrained action by the governments of the Yugoslavia's six federal republics, printing money at will for financing economically unfeasible ventures of the failing self-management enterprises, was the country's major cause of inflation.

Even though Friedman's infallible analysis is well backed up with historical records, most people still remain convinced in their rooted beliefs that the worker self management system is itself sound. While there are other equally significant flaws of Yugoslavia's worker self-management enterprises that are worth discussing, in order to cement Friedman's findings and help further illuminate the unpleasant truth, we will limit this writing to examining how the the problems that he described have continued to manifest themselves both during and after privatization.

Our first sweet taste of capitalism

In 1989, in the last ditch effort to save Yugoslavia's failing economy, its leaders embarked on a liberalization through market reforms. Spearheaded by Ante Markovic - Yugoslavia's first western style politician and a strong supporter of liberalization, and with help of foreign free market advisors, a plan which was supposed to take four to five years to complete was put in practice and was halted in mid 1991, after just a year and half of implementation due to incoming wars of independence.
Despite many blocked reforms and political sabotage, signs that Ante Markovic's “shock therapy” was showing some remarkable results were out for everyone to see. Most of those old to remember that time have nothing but the words of praise and enthusiasm for life from that period. Indeed, reforms such as the halting of the inflation, the introduction of a convertible new dinar (7 dinars = 1 DM), the allowing for the creation of private limited liability enterprises, the liberalization of over 90% of all imports, and other reforms had helped put money back into people's pockets, filled once empty store shelves with produce, and brought back optimism amongst the people.

But much of that success did not come as the result of worker self-management enterprises being more productive. In fact, quite the opposite is true. Due to the arrival of competition from the private LLC enterprises, those collective ownership worker self-management enterprises started failing at the faster rate than ever before. Used to the monopoly privileges of being the sole providers of goods and services, they were now doomed from competition who offered customers with better choices. Numbers show that in just one year of reforms the number of new private LLC enterprises formed were 292,000, and that number of worker enterprises that failed during this period were 1137, with 614,400 workers losing their jobs.

Unfortunately, with the arrival of wars many of the reforms were slowed down and even completely halted. Slovenia, having had a very short war, and Macedonia, having had been largely spared of any conflicts, were both free to continue the reforms on their own terms unabated; which they did to a larger extent than the other more populous countries of former Yugoslavia, that were still fighting wars throughout the first half of the 1990s. Now, over a decade and half after the Yugoslavia's bloodiest wars in Croatia and Bosnia and Herzegovina, all of the six independent countries have had plenty of time to resume and finalize their liberalization reforms. However, looking right across the region, it cannot be but noticed that they are all, even in their full independence, still holding onto many of the collectivist relics of the past, which are still preventing them from reaching for the stars.

Privatization into worthlessness

While there are indeed many examples of companies that have successfully weathered transition through privatization and have gone onto becoming successful, on the overall scale such cases are few and far between. During the period of Markovic's reforms, one smaller part of the privatization was done after a Bolivian model through market capitalization. In this model, 50% of the shares would be offered at international auction and the other half that is owned by the government would be given to its citizens after a successful auction is made. This model ensured that the so called vital parts of a country's economy would still remain in people's hands.

The most common method of privatization in the region, which continues to the present day, is through shares offered to employees. In this model, company workers would be offered shares at a discount and with a delayed payment, since workers could not pay for their shares in advance. Naturally, this was politically the most acceptable privatization model, which was also quick and it finally fixed a part of the earlier mentioned incentive problem, as the workers who now finally owned their enterprises had more incentive to work. But that's where the advantages of this model end.
Privatization of worker enterprises in this least obtrusive way also means that some of the earlier ownership and investment problems of these enterprises are carried over and some morphed into new ones. Those tens, or hundreds, or even thousands of workers who now own their companies, still have difficulties managing their companies. Their companies are often still plagued with the problem of too many employees, and are still keen on paying too-high salaries for themselves, but making too-little investment back into the business. Managers who once made decisions on everybody's behalf now don't own enough shares to be able to have significant influence for business restructuring. When it comes to external investments, many employees are keen on blocking them for the fear of losing influence to investors over their company operations. Finally, there is the problem of investors not being interested in businesses where so many workers are bosses. As another old saying goes: “too many cooks spoil the broth.”

Just from these select few examples, it is clear that worker self-management enterprises, even when privatized, in the free market are greatly disadvantaged over the private enterprises which were built bottom up with justifications for profitability and were forged in the fires of the free market. When allowed to freely operate, the free market acts as the perfect non-discriminant disinfectant agent, taking out of the game all enterprises which are not capable of producing top goods and services which consumers want to buy. Faced with this vicious menace of perfect justice, many of the once worker self-management enterprises that were transformed into private enterprises are quickly wiped out by the scourge of the free market. Such companies finally undergo the last method of privatization, which is especially popular amongst our politicians. That of course is the asset sale privatization, which in our lands is often done quietly in secret. Enterprises that undergo the asset sale privatization most often are the devastated and ransacked enterprises which were never fully privatized due to wars, or have repeatedly failed after many subsequent dippings into the budget purse, and have finally been put into public ownership (read: to be plundered by the ruling political class).

In conclusion, those to whom the above presented arguments on flaws of worker self-management which Milton Friedman pointed out are not convincing enough that the disappearance of Yugoslavia's artificial wealth through privatization was natural and unavoidable, they should also examine other shaky aspects of this socialists economy. Two such suggestions for research are: the questionable reasoning for economic justifications for building so many worker enterprises throughout the cities and villages of former Yugoslavia, and the adequacy of the incentives for work of many geniuses who put their great talents into service of their companies in exchange for only average salaries and recognition plaques, instead of becoming Bill Gates' and Steve Jobs' of Yugoslavia. While it would have been impossible to expect after the split with Stalin and in the subsequent persecutions of Goli island in Yugoslavia that Tito would give its people all of their natural freedoms back, allowing them to keep at least their economic freedoms would have turned them into much more prosperous and happy people. And while those freedoms and wealth would probably still not have kept Yugoslavia together in one piece today, it almost certainly would have made for a much more pleasant history reading. Yugoslavia's worker self-management is a living dinosaur which was not only responsible for the violent breakup of Yugoslavia, but because of its still unfinished privatization as well as the collectivist sentiments it stirs in peoples' minds, it still continues to be the serious impediment to the progress of the six new countries. Sadly, not even their new European masters are willing to guide them to correct their errors, but instead, with their protectionist policies of quotas and subsidies and harmonization through over-regulation instead of freedom and market competition, the EU is embracing them into the new Yugoslavia.

09 August, 2013

Milton Friedman 2013 Legacy - Repeated Multigenerational Failures to Recognize and Embrace the Ideas of Milton Friedman in Countries of Western Balkans

Lion Rock Institute 2013 Milton Friedman Legacy Cocktail in Hong Kong.

I.  Final third speaker Jadranko Brkic talks about how repeated multigenerational failures to recognize and embrace the ideas of Milton Friedman have led to missed opportunities for economic prosperity in countries of Western Balkans.

II.  Closing remarks by Bill Stacey, Chairman of the Lion Rock Institute.

The first two talks from the 2013 Milton Friedman Legacy event can be viewed on our YouTube channel: http://www.youtube.com/user/slobodaiprosperitet/videos  For more info about the 2013 Milton Friedman Legacy event please visit the Lion Rock Institute website: http://www.lionrockinstitute.org