Sorry to disagree, but I think you've stretched the "socialist planning/soft budget" concept into something else entirely....creating a muddle. The stakes are high for getting this right. 1) The soft budget argument goes that even under conditions of socialist planning - full knowledge of future demand, price of imputs, cost and availability of borrowing, etc. - firms will overinvest/overproduce creating a chronic budget deficit and that this is endemic to most known variants of socialist planning. We have just shown that none of this applies to the Yugo firms that were borrowing in and producing for one of the most unstable capitalist markets in modern times. For these large internationally oriented firms, the *dominant* conditions were a market and not a socialist economy. Lots of people "borrow too much", counting on a bailout. The western banks did it (and got their bailout!); the S&Ls did it; Chrysler did; the nuclear power industry, and on and on. And of course the IMF and the World Bank argue that this is precisely what Lat. Am. firms did. Of course no one says: 'Chase Manhattan proved the soft budget problem in Socialism'. This is actually no more than the "moral hazard" "principle/agent problem" - a far broader concept and perhaps the term Barkley meant to use. But...this raises my next concern. 2) Why was Yugoslavia caught in the debt crisis and world recession? Grossly simplifying, I find there are two schools of thought in explaining the debt crisis and subsequent depression faced by most developing countries in the '80s. Neoclassicals, the Bretton Woods institutions, etc. point to "irrational" policy behavior often caused by "moral hazard" agent/principle problems: firms that borrowed for unprofitable projects (often counting on govt. bailouts); govts. that allowed their companies and populace to "live beyond their means" (often counting on ultimate debt relief). This has created "moral hazard"; the solution is greater exposure to market "discipline". Progressives point to an irrational system. Endemic business cycles make it impossible to foresee the level of effective demand. Market unpredictability for factors inputs make it unknowable whether an investment will be profitable or a technique desirable (e.g. the Cambridge Controversy "reswitching" of the most profitable capital technique as the wage/profit share shifts). Entirely sensible borrowing will suddenly appear a reckless "moral hazard" over-borrowing. Of course reasonable people acknowledge some of the others' factors - the question is which explanation is predominant. Barkley seems to say both the dynamics of capitalism and the moral hazard problem (which he calls the soft budget constraint) - but I don't think we have heard substantive reasons. We need to count on more than "the literature says this will happen". ((A personal footnote: the two Yugoslav industries with whom I had professional contact, pharmaceuticals and petroleum refining, showed little flabbiness.)) 3) The stakes today. In some ways Yugoslavia was an early example of the export-led growth strategy. Like China today, it tried to combine a leading export sector that was mostly capitalist with a lagging domestic that was non-capitalist. Of course it lacked E. Asia's geographical advantages (being tied to slower growth Europe) and perhaps lacked E Asia's strong central strategic capacity (ironic, no?). The analogy to China is one immediate reason why I feel it is so important to better understand the economic causes of Yugo.'s collapse. I imagine we will hear a much more insistent drumbeat for "reform" of China's economy (around the time of China's first real recession?). The calls will go out to impose mkt discipline on the capitalist sector and finally end its domestic non-capitalist arrangements. If we got it wrong in Yugoslavia and that helped to lead to war and genocide, imagine the stakes for the world in China. Paul Altesman At 11:25 AM 3/27/97 -0800, Rosser Jr, John Barkley wrote: >Paul, > I do not disagree that Yugoslavia's stagnation in the >1980s had a lot to do with its exposure to the world >capitalist economy and the hit its exports took as well as >the subsequent reluctance of international lenders to lend >more. However, you miss the boat by looking at this number >of "government-guaranteed" loans. That is not the essence >of the soft budget constraint. The latter arises from the >willingness of the state to subsidize the losses of the >firms it owns, thus leading those firms to be careless >about their efficiency and not avoiding losses. This >extends to borrowing too much, irrespective of any official >state guarantee of the loans themselves. >Barkley Rosser