BELGRADE -- The well-stocked store shelves of this nonaligned communist country used to be a taunt to the neighboring, shortage-plagued economies of the Soviet Bloc. But now, with their ever-shifting price tags, they might also bear a warning: socialism in its modern form may induce galloping inflation.
Traditional Marxist theory describes inflation as an exclusively capitalist phenomenon. But Yugoslavia now has the dubious distinction of having the highest annual inflation rate in Europe -- 140 percent -- and the bleak prospect of surpassing 200 percent by the end of this year, according to some local economists.
On Saturday, Yugoslav Prime Minister Branko Mikulic unveiled new emergency measures to break the price spiral, including drastic price increases followed by a price freeze at the new levels and some new controls on wage growth.
Diplomats said the complex measures were the strongest yet initiated by Mikulic's 18-month-old government to control the economy.
Then on Tuesday, the Yugoslav National Bank devalued the national currency, the dinar, by 24.6 percent. National Bank Vice Governor Branko Dragas said the currency was devalued to match the rise in producer prices, Reuter reported.
Inflation here, however, has already proved invulnerable to successive government packages of wage controls, budget cuts and interest rate increases during the past four years. Two previous, partial price freezes imposed by Mikulic only seemed to make inflationary pressures worse.
The price increases, meanwhile, have been hitting consumers hardest. Even before Saturday's round, food prices over the past year had soared 40 percent for margarine, for example, and 500 percent for onions. Clothing manufacturers recently tripled prices for spring fashions.
"Every day something seems to disappear from the market," said a Belgrade teacher. "That means the next day it will be back at double the price."
Beleaguered political leaders and economists have come to the conclusion that the price spiral is deeply rooted in the way Yugoslavia has organized its economy. Although the socialism of this Balkan nation remains distinctive, the lessons emerging here suggest that triple-digit price increases could become as prevalent a threat to the communist-ruled world in the 1990s as they have been to South America in the 1980s.
"The institutional setup does tend to be inflationary," said Milos Crnjo-Brnja, planning minister for the republic of Serbia. "There are a number of very basic ingredients at work. Our problems are more complex than those of western inflationary situations."
Beginning in the early 1960s, Yugoslavia was the first communist-ruled country that sought to replace the central planning of the state-owned ecnomomy with a capitalist-style marketplace, a move now being tried by the Soviet Union, China and much of Eastern Europe.
Belgrade also pioneered "self-management," the system under which employes are supposed to control their own firms through workers' councils. That innovation has since spread to the Soviet Union, Poland, Hungary and Bulgaria.
While they freed the economy from shortages, both reforms also encouraged inflation. Workers' councils, it turned out, have a tendency to vote themselves wage increases at the expense of investments and even profits.
The market created in socialist countries, meanwhile, tends to give producers the freedom to set prices but leaves out some of the key incentives for keeping prices down. Many firms enjoy monopoly status, imports are restricted, and because layoffs are discouraged, many companies with stagnating productivity simply raise prices rather than cut back staff.
"The problem is that market mechanisms don't really operate," said Crnjo-Brnja. "Not a small measure of inflation is induced by political decisions rather than economic decision."
Every East European country that has pursued the market-oriented economic reform has had similar troubles. Poland, which began its reform in 1981, has had double-digit inflation ever since and expects price rises of up to 57 percent next year. Hungary's inflation has risen to more than 30 percent, and China was recently forced to adopt strong new measures to halt a price spiral that had topped 10 percent for the first three quarters of the year and threatened to worsen.
In Yugoslavia, the raging inflation has become an index of the increasing disorder of a country divided into eight distinct and often feuding republics and provinces.
Prime Minister Mikulic, who has seen inflation rise from 90 to 140 percent during his 18 months in office, preceded his emergency measures with a broad, long-term stabilization program.
"The three-digit inflation is a sympathetic expression of the depth of the crisis and of the disturbances and imbalances that have been accumulating for many years in the Yugoslav economy," he said.
If the new program fails, many Yugoslav and western observers say, Mikulic may be forced from office, and Yugoslavs may lose patience with their decentralized political system.
"Yugoslavs can tolerate economic difficulties, but there is always a point beyond which we cannot go," said Stefan Niksic, an editor for the weekly magazine Nin. "We have already reached that point."
One of the government's chief problems in trying to control price movements is its own relative lack of influence. Even though the state supervises the economy, the self-management and partial-market systems mean that state authorities have even less influence on economic developments than do their counterparts in western countries.
This year, for example, Mikulic's government limited monetary expansion to 80 percent -- well below the inflation rate -- and introduced tough measures designed to force cutbacks in real wages. But thousands of companies were able to avoid the money squeeze by issuing promissory notes, a practice virtually uncontrolled by the government.
These "gray emissions," or the creation of money by nongovernmental authorities, led in September to the eruption of Yugoslavia's most serious postwar financial scandal. Agromerc, a huge agroindustrial firm in Mikulic's home republic of Bosnia-Herzegovina, was found to have issued up to $950 million worth of notes with nothing to back them.
High-level political figures, including federal Vice President Hamdija Pozderac, have been charged with allowing or covering up the illegal emissions, although investigators and economists have said the problem of such notes is widespread. "There is a huge amount of such paper debt circulating out there with nothing hard to back it," said a diplomat. "It's an important cause of inflation."
There are other such troubles peculiar to a socialism-in-transition. A tax system left over from the old central planning system puts the burden on companies rather than on income or spending, discouraging firms from cost-cutting moves to lower prices. Competition has been blocked by the erection of bureaucratic barriers in each of the republics and provinces to keep out products from other republics.
Correcting such systemic problems is a slow, painstaking process. Among other things, Mikulic's government is supporting constitutional amendments to increase the central government's power as an economic regulator. But approval could take a year or more.
Meanwhile, the government is counting on foreign creditors to provide leeway for stopgap measures. In negotiations with the private banks and foreign governments that hold its $20 billion foreign debt, Belgrade is seeking to reschedule payments. Such a move would allow it to reduce the amount of its annual foreign exchange earnings it uses for debt payments from 46 percent to 25 percent.
The easing of payments would allow Yugoslavia to spend more on western imports, government officials say. This would provide competition for national producers in key areas and drive prices down. To win this concession, several officials indicated, Yugoslavia may be willing to negotiate a new economic stabilization program with the International Monetary Fund.
Western officials and some Yugoslav analysts are skeptical. "It is not clear that there is any political authority that can put a stop to inflation at this point," said one government planner. "What we are doing is like trying to cure AIDS with Band-Aids."