The theoretical framework, within which the likely impact of selfmanagement on enterprise investment was analysed in the preceding two chapters, will now be supplemented by an analysis of the effects of socialist features of the Yugoslav economy on enterprise behaviour. For this purpose, we will rely mainly on Kornai's (1980) theory, but without giving a comprehensive survey of his work. Since not all of Kornai's hypotheses are fully applicable to Yugoslavia, we will focus only on those parts of the theory which are directly relevant to Yugoslavia. In particular, Kornai points to certain general features of the traditional centrally planned economy, suggesting that these are likely to persist even after economic reforms aimed at decentralization and a higher reliance on the market have been implemented. Although Kornai initially (1980) developed his theory primarily for Hungary and other members of the CMEA, he later (1986) extended it to other socialist economies, suggesting that the theory is also applicable to Yugoslavia.

Kornai's theory of the socialist system

According to Kornai (1980), social relations and institutional conditions generate definite forms of behaviour, economic regularities and norms. The behaviour of the enterprise in a socialist economy is determined by the nature of the socialist system. One of the most fundamental features of the socialist system is the ‘paternalistic’ relationship between the state and the firm. Both before and after economic reforms aimed at greater reliance on market forces, the firm has been constantly protected and supported, to various degrees, by the state. While paternalistic tendencies appear from ‘above’ (state organs), this is complemented with the demand for paternalism from ‘below’ (enterprises).