Despite common origins, the economy of the Socialist Federal Republic of Yugoslavia (SFRY) was much different from economies of the Soviet Union and other Eastern European socialist countries, especially after the Yugoslav-Soviet break-up of 1948. The occupation and liberation struggle in World War II left Yugoslavia's infrastructure devastated. Even the most developed parts of the country were largely rural and the little industry the country had was largely damaged or destroyed.
Yugoslavia was once a regional industrial power and economic success. Two decades before 1980, annual gross domestic product (GDP) growth averaged 6.1 percent, medical care was free, literacy was 91 percent, and life expectancy was 72 years. But after a decade of Western economic ministrations and five years of disintegration, war, boycott, and embargo, the economy of the former Yugoslavia collapsed.
Collapse of Yugoslav economy was partially caused by its non-aligned stand that had resulted in access to loans from both superpower blocs. This contact with the United States & the West opened up Yugoslavia’s markets sooner than the rest of Central and Eastern Europe. Despite Belgrade's non-alignment and its extensive trading relations with the European Community and the US, the Reagan administration targeted the Yugoslav economy in a "Secret Sensitive" 1984 National Security Decision Directive (NSDD 133), "Us Policy towards Yugoslavia." A censored version declassified in 1990 elaborated on NSDD 64 on Eastern Europe, issued in 1982. The latter advocated "expanded efforts to promote a 'quiet revolution' to overthrow Communist governments and parties," while reintegrating the countries of Eastern Europe into a market-oriented economy.
Western trade barriers, dramatically reduced its economic growth. In order to counter this, Yugoslavia took on a number of International Monetary Fund (IMF) loans and subsequently fell into heavy IMF debt. As a condition of receiving loans, the IMF demands "liberalisation" of Yugoslavia. By 1981, Yugoslavia had incurred $19.9 billion in foreign debt. However, Yugoslavia’s real concern was the unemployment rate, at 1 million by 1980. Real earnings in Yugoslavia fell 25% from 1979 to 1985. By 1988 emigrant remittances to Yugoslavia totalled over $4.5 billion (USD), and by 1989 remittances were $6.2 billion (USD), making up over 19% of the world's total.
In 1989, before the fall of the Berlin Wall, Yugoslav federal Premier Ante Marković went to Washington to meet with President George Bush, negotiating for a new financial aid package. In return for assistance, Yugoslavia agreed to even more sweeping economic reforms, including a new devalued currency, another wage freeze, sharp cuts in government spending, and the elimination of socially owned, worker- managed companies. The Belgrade nomenclature, with the assistance of Western advisers, had laid the groundwork for Marković's mission by implementing beforehand many of the required reforms, including a major liberalization of foreign investment legislation.
This was in part muted by the spectacular draining of the banking system, caused by the rising inflation, in which millions of people were effectively forgiven debts or even allowed to make fortunes on perfectly legal bank-milking schemes. The banks adjusted their interest rates to inflation, but old credit contracts stipulated constant interest rates. Repayments of debts for privately owned housing, which was massively built during the prosperous 1970s, became ridiculously small and banks suffered huge losses. Indexation was introduced to take inflation into account, but the resourceful population continued to drain the system through other schemes, many of them having to do with personal cheques.
Personal cheques were widely used in Yugoslavia in pre-inflation times. Cheques, which were considered legal tender, were accepted by all businesses. They were processed by hand and mailed by regular post, so there was no way to ensure real-time accounting. The banks therefore continued to deduct money from current accounts on the date they received the cheque, and not on the date it was issued. When inflation rose to triple and then quadruple digits, this allowed another widespread form of cost reduction or outright milking of the system. Bills from remote places would arrive six months late, causing losses to businesses. Since banks maintained no-fee mutual customer service, people would travel to small banks in rural areas on the other end of the country and cash in several cheques. They would then exchange the money for foreign currency, usually German mark and wait for the cheque to arrive. They would then convert a part of the foreign currency amount and repay their debt, greatly reduced by inflation. Companies, struggling to pay their work-force, adopted similar tactics.
New legislation was gradually introduced to remedy the situation, but the government mostly tried to fight the crisis by issuing more currency, which only fueled the inflation further. In the late 1980s, the state of the economy was commonly considered a joke. Power-mongering in the big industry branch-wide companies led to several large failed investments (mostly large factories), which only increased the public perception of a deep crisis. After abortive attempts to fight inflation with various schemes, the government of Branko Mikulić was replaced by a new government, headed by Ante Marković, a pragmatic reformist. He spent a year introducing new business legislation, which quietly dropped most of the associated labour theory and introduced private ownership of businesses. While public companies were allowed to be partially privatised, mostly by investment, the concept of social ownership and worker councils were retained.