Contrary to the usual assumption, socialist society in Croatia was dynamic; changes and attempts at improving the organisation of society were continual; the same was the case with politics, economic relations and the banking industry. At the beginning period of central planning money and banks had a very limited role. The subsequent reforms reflected ideological and political changes, but also expressed an understanding of how to activate resources and how to combine them for satisfactory production. The following short historical overview shows the process of decentralisation of particular property rights which were, like everything else, under the control of the state from the beginning of communist rule.
After WWII Croatia, as a part of Yugoslavia, had accepted a banking system of the Soviet type (the so called mono-bank system), which corresponded to a
18 Janos Kornai (1984) developed the theory according to which overinvestment and soft budget
constraints are common for the behaviour of the socialist firm. Uvalic (1992) tested and confirmed that theory for the self-managed firm in Yugoslavia.
centrally planned economy. There was only one bank with branches around the country. Production quotas were ordered by the organ of planning, and prices and wages were fixed. Money was a unit of account and a means of payment. Private households and individual producers were not permitted to have bank accounts, while “public persons” were not allowed to hold currency – they were obliged to deposit all currency received in dealing with the private sector into a bank account. Self-management cannot work in the environment of a mono-bank system. The rights of a company to set prices and freely distribute income don’t bring much practical value if individuals don’t have bank accounts.
The mono-bank system was gradually abolished in the 1950s: former branches of the Central Bank became communal banks having the right to accept short time deposits from enterprises and households, and to provide short-term commercial loans (for example a loan for the procurement of coal for the winter season). Banks were authorized to conduct a limited number of simple operations. Larger investments were the responsibility of state funds (Babic et al 1999). Money management in companies was strictly regulated. Enterprises were obliged to run different accounts for different expenditure purposes: a company might have money to pay suppliers but not the right to use it for this purpose because it was in the account for wages. Liquidity management wasn’t autonomous. In other words, property rights in the management of a firm’s income were limited. The financial system was stiff and firmly controlled.
Slowly, by way of several successive reforms, the management of banks was decentralised, and the number of financial instruments was increased. The savings rate of self-managed companies was very high, and the rate of investment even higher (Uvalic 1992, p. 69), but this was mainly a consequence of compulsory savings and investment, ordered by strict regulation. Additionally, the Party’s officials constantly criticised companies for the low rate of voluntary savings, attempting by that means to stimulate economic growth. The allocation of investments wasn’t efficient. Bajt has found that, “had the efficiency of the Yugoslav investment during 1950-80 been similar to that of comparable capitalist countries, the gross social product in 1980 would have been twice as high as it actually was” (Bajt 1993/2001, p. 39).
Interest rates were fixed, and there was no adjustment for inflation. The maximum returns from investment in savings deposits were negative in real terms. “Such an interest rate policy was a cause of significant redistribution from households (as
net lenders) to enterprises (as net borrowers)” (Uvalic 1992, p. 98). Hence, the regulation of the banking sector deformed the tendency that was identified by Furubotn and Pejovich that workers prefer distribution of net income in individual assets over joint investment.
In the 1970s the legislature opened the possibility for any group of companies and other public persons (local communities, associations, but not private individuals) to set up a business bank, individually or jointly. Workers’ remittances from the West flowed into the country.19 Since the Yugoslavian current account deficit was
very large, the remittances were helpful for servicing international debt. Unlike the situation in other socialist countries, the banks were allowed to run personal accounts denominated not only in domestic but also in foreign currency, which were protected from domestic inflation. Croats and Slovenians used to save mainly in foreign currencies. Personal savings, including foreign currency accounts, were guaranteed by the state in full.
The founders of banks had got autonomy from the state in the management of banking. All founders had the same voting power regardless of the amount that they invested in the bank. Workers’ councils (the councils of bank employees) didn’t have the same role in banking as in other industries. Later, big institutional depositors, which were usually at the same time big borrowers, received management rights as well. Towards the end of the socialist period their influence in running banks was modified in line with the proportion of deposits or the importance of the company which was the bank’s partner. Incestuous ownership relations between companies and banks were created at that time. The banking market in Croatia remained segmented for many more years (Kraft et al 2002). This was completely in line with the ideology that saw banks as “a service of ‘associated labour’” and not profit-making institutions. The financial system was designed to put into economic activity as much money as possible regardless of how sensible the activity was. Investments were very often guided by social goals and not commercial logic. A chronically high inflation rate was somehow built into the system.
Strictly speaking, the principle that wealth could be deserved if it was a consequence of effort, which was emphasised in socialism, was betrayed by an overemphasis on the principle of solidarity, which appeared to be practiced by printing money
19 According to UN statistics the Croatian Diaspora is 11 percent of the population. But, in the EU
alone there live 750 000 Croats, which is more than 15 percent of the population. Many of them are not classified as Diaspora but as temporary workers, though they have live abroad for decades and have families there.
at the expense of all those who were frugal, prudent and responsible. Therefore, the banks were empty of sound money and long-term savings. Domestic currency had even lost its basic purpose of being a measure of value, because of chronically high inflation. People and companies instead used the Deutsche Mark, which was the most common currency of remittances from workers who lived abroad.20
Therefore, people didn’t count much on the financial system as a place for their personal investment but placed it instead in durable material goods, like houses and summerhouses. The system and especially its ideology dissipated and wasted work and wealth.21 Later in the chapters about privatisation in Croatia and
Slovenia it will be shown that the regulation of the financial industry was more decisive for the process and outcome of the transformation of property rights than the initial structure; that is self-management and social ownership in both countries.