Bosnia and in Macedonia was 70% of the Yugoslavia average (OECD, 1992). These spending differentials were the result, inter alia, of different initial endowments and incomes, but equally important, the strong reliance, peculiar to the socialist world, on "derivation-based" systems of revenue sharing. Most fiscal revenues were notionally "owned" and retained by the areas in which they were collected, so that the socialist revenue systems typically benefited those areas with the more robust tax bases.

_Regional Redistribution Policies and Whto Gainedfrom Cross-Subsidies?_ Addressing the huge regional imbalances in income and expenditures was an objective of Federal policy very early on. Federal support to the republics came through two channels: a fiscal channel and a financial channel. The fiscal channel had several dimensions. The "Fund for the Development of the Least Developed Regions," established in 1965, introduced explicit support to the lessdeveloped regions in Yugoslavia -- Bosnia and Herzegovina, Montenegro, Macedonia and Kosovo.7 At its peak, this fund mobilized some 2 percent of GSP -- from the better off regions who contributed a fixed proportion of their GSP to fund its resources.8 Federal budgetary resources were also directed to raising the level of social outlays in the poorer republics. The financial channel operated through the Republic-level commercial banking systems and the central bank,<sup>9</sup> and contributed both to Yugoslavia's hyperinflation and external indebtedness.

Many attempts have been made to estimate the overall magnitude and net effects of these fiscal and financial transfers between republics. Vodopivec's (1991) empirical estimate of the net redistribution among republics of all the subsidies and taxes suggests that the three better off republics (Slovenia, Croatia, and Serbia) were net "taxpayers" and the three less developed republics (Bosnia and Herzegovina, Macedonia, and Montenegro) were significant net beneficiaries. Such estimates, however, can only be suggestive at best, given that -- as in much of the socialist world -- the inter- republic redistributions through the fiscal and financial systems were, in the end, a series of ad hoc, bargained and very nontransparent agreements, whose effects and incentives were not at all well understood, and whose very murkiness gave rise to much dissatisfaction amongst Republics.

_Structural Vulnerabilities._ The better off republics' dissatisfaction with Federal redistributive policies was compounded by another feature of Yugoslavia's intergovernmental fiscal system -- the "bottom up" system of intergovernmental revenue flows, which Yugoslavia shared in common with most other socialist countries, and which still holds in Bosnia and Herzegovina today (Bird, Ebel and Wallich, 1995). This system conferred a very special

> 7Kosovo along with Voivodina, which is largely Hungarian-populated, is now a dependent province within SerbiaMontenegro.

> 878 percent of Federal Fund resources were mobilized from the three better off republics in the 1970's, falling to 75 percent in the 1980s (Federal Statistical Office of Yugoslavia).

> 9The financial channel was effected in two ways. First, commercial banks in each republic could supplement their deposit resources by borrowing from their republic branch of the National Bank of Yugoslavia. Empirical studies suggest that the central bank did play a role in the regional allocation of credit through this mechanism, although it is difficult to get a consistent picture of who were the gainers and who were the losers. (World Bank, 1989). Second, the commercial banks in each republic financed the financial losses of enterprises which amounted to 5-6 percent of GSP in the latter part of the 1980's. The inflation (tax) this process gave rise to was felt by all, but the "benefits" of the system (financing of losses) were concentrated in Bosnia and Herzegovina, Croatia and Serbia (World Bank, 1989).

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