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New Economic History of Yugoslavia, 1919 - 1939

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New Economic History of Yugoslavia, 1919 - 1939 New Economic History of Yugoslavia, 1919 - 1939: Industrial Location, Market Integration and Financial Crises Stefan Nikoli´c Doctor of Philosophy University of York Economics September, 2016 Abstract New Economic History of interwar Yugoslavia is uncharted territory. Combining historical data with modern econometrics the present thesis explores how economic development of Yugoslavia - a newly established and diverse country - was shaped by industrial location, market integration and financial crises. The results are relevant for the present as the least economically developed part of Europe today is comprised mostly of Yugoslav successor states. What determined the location of industry in interwar Yugoslavia? Using panel data econometrics and a new dataset which covers eight Yugoslav regions and ten industries over a period of eight years industrial location is explained by a model in which Heckscher-Ohlin (HO), New Economic Geography (NEG) and Path Dependence theories are captured by interaction variables. Econometric results show that all three of the tested theories had a role to play. History matters in addition to HO and NEG type forces in determining the location of industry. Were Yugoslav markets integrating during the interwar? If so, what were the drivers? Analysis of a novel panel data set of commodity prices observed over ten cities during the period from 1922 to 1939 shows that market integration increased during the interwar. City-pair commodity market integration is modeled using a set of trade cost. The progress of market integration during the interwar is explained by institutional and infrastructural advancements that reduced transaction and transport costs. Cultural differences did not impede market integration. Yugoslavia set out on a process of economic integration that was not hampered by its diversity. Did Yugoslavia and six other East European countries experience financial crises during 1931? If so, what were the main contributing factors? Newly gathered high frequency data series on indicators of currency, banking and sovereign risk crises are explored using an analytical narrative. Worsening of economic fundamentals, drop in international credit and global demand, as well as international transmission led to financial crises in Eastern Europe in 1931. Completely avoiding financial crises was elusive but the most economically developed country was the least affected. This pioneering New Economic History study of interwar Yugoslavia leads to a broad conclusion that present day economic backwardness and regional differences in economic devel- opment between Yugoslav successor states are not new and do not stem from a historical lack of market integration but can partly be explained by regionally uneven industrial development and a long history with financial crises. 2 Contents Abstract 2 List of Contents 3 List of Figures 5 List of Tables 6 Acknowledgements 8 Author’s declaration 10 1 Introducing New Economic History of Interwar Yugoslavia 11 1.1 Motivation . 13 1.2 Research questions and empirical frameworks . 17 1.3 Data set . 19 1.4 Thesis structure . 24 2 Determinants of Industrial Location 25 2.1 Introduction . 25 2.2 Industrial location in interwar Yugoslavia . 27 2.2.1 Measuring industrial location . 27 2.2.2 Exploring industrial location . 31 2.3 Explaining industrial location . 33 2.3.1 Theoretical framework . 33 2.3.2 Empirical framework . 34 2.4 Econometric analysis . 39 2.4.1 Baseline estimation . 39 2.4.2 Estimation using Generalized Method of Moments . 41 2.4.3 Statistical, economic and international relevance of industrial location determinants . 43 2.5 Summary and Conclusion . 46 2.6 Appendix A - Data Appendix . 48 2.7 Appendix B - Market potential calculation . 51 3 Market Integration of a Uniquely Diverse Country 56 3.1 Introduction . 56 3.2 Commodity market integration in interwar Yugoslavia (1922-1939) . 57 3.2.1 Data set and overall picture . 58 3.2.2 Market integration over time and different regions . 62 3.3 Explaining commodity market integration until 1925 - historical interpretation 65 3.3.1 Removal of institutional barriers to market integration (1919-1925) . 65 3.4 Explaining commodity market integration 1926-1939 - empirical framework and econometric results . 68 3.4.1 Distance dependent trade costs . 68 3.4.2 Network dependent costs . 70 3 3.4.3 Location specific trade costs . 73 3.4.4 Econometric estimation . 73 3.4.5 Robustness checks . 75 3.5 Summary and conclusion . 78 3.6 Appendix C - Data Appendix . 80 4 Financial Crises in Eastern Europe in 1931 81 4.1 Introduction . 81 4.2 Documenting financial crises in CESEE during 1931 . 83 4.2.1 Currency crises . 84 4.2.2 Banking crises . 87 4.2.3 Sovereign default risk crises . 89 4.2.4 Summary of financial crises in CESEE during 1931 . 92 4.3 Explaining financial crises in CESEE during 1931 . 94 4.3.1 Global shocks and macroeconomic fundamentals . 94 4.3.2 International transmission of financial crises - terminology and definitions 98 4.3.3 Finance channel spillovers . 99 4.3.4 Trade channel spillovers . 105 4.3.5 International financial contagion . 108 4.4 Summary and conclusion . 110 4.5 Appendix D - Data Appendix . 112 5 Conclusion 115 Sources 119 Literature 126 4 List of Figures 2.1 Map of Yugoslavia according to 1921 administrative regions . 29 2.2 Map of Yugoslavia showing the fit of SUZOR regional offices to 1921 adminis- trative regions . 29 3.1 Coefficient of variation (CV) between cities, Yugoslavia 1922-1939 . 60 3.2 Variance decomposition - variance between and within religious city-groups . 63 3.3 Variance decomposition - variance between and within religious city-groups, including religion-specific within variance . 64 4.1 Central bank (gold and foreign exchange) reserves of seven CESEE countries (7 May to 31 December 1931, weekly frequency, April value = 100) . 86 4.2 Commercial bank deposits of five CESEE countries (Jan to December 1931, monthly frequency, April value = 100) . 88 4.3 Long-term sovereign bond yields of seven CESEE countries (7 January to 16 September 1931, weekly frequency, basis points) . 91 5 List of Tables 1.1 Novel data set on interwar Yugoslavia . 20 1.2 Overview of main Yugoslav statistical source materials used in the present thesis 23 2.1 Cross-check of SUZOR data on insured industrial workers with Industrial Census data on industrial employees (1938 benchmark) . 30 2.2 Distribution of insured industrial workers across industries and regions (popula- tion weighted, 1932-1939 average) . 32 2.3 Regional characteristics (1932-1939 average) . 35 2.4 Industrial intensities . 37 2.5 Heckscher-Ohlin, New Economic Geography, and Path Dependence captured through interaction terms of regional characteristics and industrial intensities 38 2.6 Modeling Yugoslav industrial location 1932-1939: Pooled OLS estimations with three-way fixed effects . 40 2.7 Modeling Yugoslav industrial location 1932-1939: Difference-GMM (one-step) estimations including time fixed effects . 42 2.8 Standardized beta-coefficients of statistically significant interaction variables 43 2.9 Regional simulations: Economic importance of HO and NEG compared . 44 2.10 Determinants of industrial location during the interwar period (c.1920-1939) 45 2.11 Yugoslav domestic and foreign trade by means of transport (as % of domestic or foreign trade volume), 1925-1938 . 52 2.12 Yugoslavia’s trade with Austria, Italy, Germany and Czechoslovakia (as % of total trade value), 1920-1938 . 54 2.13 Trade tariffs of Austria, Italy, Germany, Czechoslovakia and UK (customs revenue over value of imports), 1932-1939 . 55 3.1 Summary of the commodity dimension of the data set . 59 3.2 Average and commodity specific coefficient of variation (CV) for 1922 and 1939 and average rates of change in per cent (1922-1939) . 62 3.3 City-pair railway distance (km) matrix for 1925, including changes from 1925 to 1935 . 69 3.4 City-pair religious matching probability matrix for 1921, including changes from 1921 to 1931 . 72 3.5 Modeling Yugoslav commodity market integration 1926-1939 . 75 3.6 Robustness check: sample conditional on city-pair proximity . 76 3.7 Robustness check: differential effects of real transport costs and religion on individual commodities . 77 3.8 Data for figure 3.1 . 80 3.9 Data for figures 3.2 and 3.3 . 80 4.1 Time-line: European Financial Crisis of 1931 in Austria, Germany and Britain 83 4.2 Overview of long-term sovereign bonds used . 90 4.3 Summary of Financial Crises in CESEE-7 during 1931, as well as the dates of the introduction of exchange controls, official devaluation of currency, and default on foreign sovereign debt . 93 6 4.4 Composition of exports (percentage of primary and manufactured products in total exports) for nine CESEE countries, 1928-1929 average . 95 4.5 GDP per capita (1990 GK USD), value of exports (in current USD) per capita, occupational shares in agriculture (percentage of working population in agricul- ture in total working population) and openness ratio (exports plus imports as share of GDP) of seven CESEE countries in 1930 . 96 4.6 Dates of pre-crisis peaks and changes in economic activity (in per cent) of eight CESEE countries . 98 4.7 Export shares (percentage of total value of exports) of seven CESEE countries captured by Austria and Germany, for 1929, 1930 and 1931. 107 4.8 Current export values (million of national currency of the exporter) of seven CESEE countries to Austria, Germany and Hungary for 1929, 1930 and 1931. 107 4.9 Data for figure 4.1 . 112 4.10 Data for figure 4.2 . 113 4.11 Data for figure 4.3 . 114 7 Acknowledgements Enormous gratitude goes out to my mentor Matthias Morys. His careful reading and Socratic questioning of my research have inspired me to improve the thesis with every new draft. Moreover, his continued support has enabled me to present ongoing research internationally and encouraged me to take the numerous challenges of writing a PhD thesis head on.
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