Yugoslavia inherited formidable economic problems after World War I. The new kingdom had to repair war damage, repay debts, eradicate feudalism by passing land reform, integrate differing customs areas, currencies, rail networks, and banking systems, and make up for shortages of capital and skilled labor.

The agricultural sector, which employed over 75 percent of the Yugoslav population, underwent a radical reform that failed to relieve nagging rural poverty. Before the war, German, Austrian, and Hungarian families owned sprawling estates in Slovenia, Croatia, and Vojvodina; Turkish feudalism remained in Kosovo and Macedonia; Muslim landlords in Bosnia owned large farms worked by Christian sharecroppers; some Dalmatians remained tenant farmers in a system devised in Roman times; and Serbia was a chaotic blend of independent small farms. The Yugoslav government erased remnants of feudalism, but the peasants received plots too small for efficient farming to support the rural population. Yields fell and poverty and ignorance dominated most of the peasantry. Industrialization and emigration did not ease overpopulation.

In the industrial sector, Yugoslavia concentrated on extracting raw materials, expanding light industry, and improving its infrastructure. Insufficient domestic capital forced Yugoslavia to seek foreign investment. The government sold mining rights to foreign firms and borrowed heavily to build roads and rail lines, power plants, and a merchant marine. Despite steady economic growth based on the food industry, mining, and textiles, Yugoslavia remained substantially undeveloped and fell far behind the rest of Europe. Divergent economic interests and the widening differences in development of Croatia and Slovenia with the lessdeveloped southern regions exacerbated Serbian-Croatian tensions. The development disparity especially embittered many Serbs, who believed that their sacrifices in the war had benefited former enemies more than themselves.

Yugoslavia's foreign policy in the 1920s sought to counter threats from Italy, Hungary, and Bulgaria, and to secure regional peace through a series of Balkan alliances. The young kingdom was a charter member of the League of Nations. In 1921 and 1922 Yugoslavia, Romania, and Czechoslovakia signed mutual defense and political treaties aimed at blocking a Habsburg restoration and blocking the ambitions of revisionist Hungary. This alignment, later known as the Little Entente, won support from France, which hoped to block Soviet expansion and contain Germany. In 1927 Yugoslavia and France signed a treaty of friendship. Though it was the focus of Yugoslav foreign policy for the next decade, this treaty included no military provisions and failed to relieve the fear of fascist Italy.

Data as of December 1990