Initial steps toward market socialism (see Glossary) and freer foreign trade in 1961 produced unacceptable inflation and a foreign-trade deficit, and emergency anti-inflation measures plunged Yugoslavia into recession in 1962. The recession produced an urgent debate on fundamental economic reforms, especially decentralization of investment decision making. During the debate, naturally conflicting interregional economic interests rekindled ethnic rivalries, and emotional nationalist claims reemerged to complicate economic discussions. Party leaders were unable to solve the widening economic gap between the country's more prosperous northern republics and the underdeveloped southern regions. Resentment grew from suspicions that some republics were receiving an unfair share of investment funds.

The government adopted stopgap recentralization measures to end recession in 1962, but inflation and the foreign-trade deficit again rose sharply, renewing debate on economic reforms. Led by Eduard Kardelj and Vladimir Bakaric, party liberals (mostly from Slovenia, Croatia, and the Belgrade area) promoted decentralization measures and investment strategies that would benefit the wealthier republics. Conservatives (mostly from Serbia and Montenegro) supported maintaining or stiffening central controls and continuing investment in the less developed regions (see Overhaul in the 1960s , ch. 3).

In 1963 Yugoslavia established new constitutions at the national and republican level, expanding the concept of self-management beyond the economic sphere into social activity. This was achieved by creating local councils on education and culture, social welfare, public health, and political administration. The composition of the Federal Assembly was altered, simultaneous officeholding in the party and government was outlawed (except for Tito), and government tenure was limited and dispersed by the introduction of a regular rotation system (see The 1963 Constitution , ch. 4).

In the mid-1960s, the parliamentary institutions became more active, as assembly members criticized ministers and amended bills, and liberal reformers used the assembly to advance their ideas. Between 1964 and 1967, the assembly reduced the role of the state in economic management and created the legislative foundation of market socialism. Reform also included external trade measures: Yugoslavia devalued its currency, obtained foreign loans, and joined the General Agreement on Tariffs and Trade ( GATT--see Glossary).

The period immediately following this set of reforms brought stagnation, rising unemployment, unpopular price increases, illiquidity, increases in income disparity, and calls for new reforms. Leaders in Serbia, Montenegro, Macedonia, and elsewhere scrambled to stave off efforts to close unprofitable enterprises in their areas. Slovenes and Croats came to resent requirements for heavy investment in less developed republics at the expense of their own modernization. Yugoslav workers themselves eased unemployment by finding guest worker jobs in Western Europe (see Structure of the Economy , ch. 3). Foreign tourists and workers returning from abroad brought Yugoslavia much-needed foreign currency. A 1967 law allowed foreigners to invest up to 49 percent in partnerships with Yugoslav firms and repatriate their profits, and in 1970 Yugoslavia signed a long-sought commercial agreement with the European Economic Community ( EEC--see Glossary). The post-reform recession ended in 1969 as unemployment dropped and incomes and living standards rose, but inflation again gained momentum and many enterprises remained unprofitable (see The Economic Reform of 1965 , ch. 3).

Certain that the reforms would undermine party control and threaten Yugoslavia's survival, pro-centralist party leaders and mid-level bureaucrats attempted to obstruct their implementation. Again the centers of this movement were Serbia and Montenegro. The key opponent of reform was the hard-line Serbian vice president of Yugoslavia, Aleksandar Rankovic, who also directed party cadres and the secret police. In 1966 the army intelligence unit, composed mostly of Croats, examined complaints that secret police was mistreating Albanians in Kosovo. The investigation uncovered a wide range of unethical practices, including smuggling and surveillance of Tito himself. Tito purged the secret police, and Rankovic was forced to resign (see Internal Security , ch. 5). But he remained the champion of Serbian nationalist groups, particularly on the issue of Kosovo.

After the defeat of the conservatives and adoption of additional party reforms, the party central organization lost its predominant position. Republican and provincial party leaders blocked action taken in Belgrade and gained control of party appointments, thus shifting the focus of party loyalty away from the center. New election laws brought direct multicandidate elections, often won by candidates who lacked party approval.

Party discipline softened when the ascendant liberals continued to argue that the League of Communists should influence rather than direct self-management decision making. The press and universities grew into centers of debate on an expanding list of taboo issues. Beginning in 1968, a group of intellectuals in Zagreb and Belgrade, known collectively as the Praxis circle, circulated unorthodox interpretations of Marx, supported student demonstrations, and criticized the rigidity of party positions. Despite official efforts to suppress it, the Praxis circle flourished and spoke out until 1975.

In 1968 attention moved back to foreign policy. Student unrest subsided, and Yugoslav-Soviet relations again sagged after Warsaw Pact nations invaded Czechoslovakia in August 1968. Tito, who had traveled to Prague before the invasion to lend support to Alexander Dubcek's program of "socialism with a human face," denounced the invasion, and Moscow and Belgrade exchanged bitter criticism. The Yugoslavs warned that they would resist a Soviet invasion of their country, and Tito established a civil defense organization capable of mobilizing the entire country in such an event (see National Defense , ch. 5).

The quiet that the invasion of Czechoslovakia brought to the Yugoslav domestic scene was broken in November 1968 when ethnic Albanians in Kosovo and western Macedonia staged violent demonstrations to demand equality and republican status for Kosovo. Demonstrations and violent incidents continued through 1969. Among broad government concessions to the ethnic Albanians, a 1968 constitutional amendment allowed local economic and social planning and financial control in Kosovo. Serbian and Montenegrin intellectuals condemned the upgrading of Kosovo's status, and accurately predicted that Albanian abuses would increase Serbian emigration from Kosovo. The creation of a separate Macedonian Orthodox Church and rising Muslim nationalism in Bosnia also irritated Serbian churchmen and intellectuals during this period.

After tough political bargaining, the Skupstina adopted constitutional amendments in 1971 that transformed Yugoslavia into a loose federation. The amendments limited federal government responsibilities to defense, foreign affairs, maintenance of a unified Yugoslav market, common monetary and foreign-trade policies, the self-management system, and ethnic and civil rights. The republics and provinces gained primary control over all other functions and a de facto veto power over federal decisions.

Data as of December 1990