Open and nonaligned, Yugoslavia prospers. But Balkan nation has large foreign debt and high inflation

The border guard lets visitors pass with a cursory glance. Austrian and West German cars clog the roads. Stores stock Western goods, including newspapers and magazines. As these images suggest, Yugoslavia no longer lies behind the Iron Curtain. Although Winston Churchill placed the curtain's frontiers along Yugoslavia's western border in his 1946 speech, the country broke from its alliance with the Soviet Union in 1948.

Ever since, it has straddled East and West. Yugoslavia has remained communist while building a nonaligned foreign policy, a unique system of decentralized government, and workplace democracy.

``For us, the Iron Curtain is a fairy tale,'' says Damir Grabusia of the Communist Party Central Committee in the Croatian republic. ``For the rest of Eastern Europe, it is a reality.''

But this hard-won achievement is in jeopardy. Yugoslavia faces daunting problems: a large foreign debt, near triple-digit inflation, and sharpening regional rivalries. Unless reforms are enacted to make the economy more efficient, many Yugoslav and Western observers fear the country will fall far behind the West in technology and become dependent on trade with the Soviets.

Such a possibility worries the West. Yugoslavia occupies a sensitive geographic position on the underside of Western Europe. After initially hesitating in 1948, the West has generously supported Yugoslavia's communists. An emergency effort just ended, in which the United States and Western Europe lent millions of dollars to keep the country liquid during a debt crisis.

Over the years, the Western aid has helped create the most prosperous, free, and Western society in Eastern Europe. Unshackled from the straitjacket of Soviet-style central planning, a backward Balkan society was transformed in one short generation. Before World War II, for example, less than 5 percent of the country's exports consisted of finished goods. Now the figure is more than 60 percent.

Western contacts are widespread. Millions of Western tourists sun in the summer on the Adriatic beaches, while nearly 1 million Yugoslavs work in Western Europe. Yugoslavs can travel wherever they want. ``I visit my cousin in West Germany every year,'' says Natasa Mance, a teacher in Zagreb. ``This country is open.''

Certainly Yugoslavia is easier to visit than other East European countries. Although a journalist's visa for Czechoslovakia or Poland can take weeks to obtain, a press visa for Yugoslavia is delivered in seconds.

Once inside Yugoslavia, the atmosphere also is different. Elsewhere in Eastern Europe, a Western visitor's most innocent of requests often provokes deep displeasure. One example: A Czech official hesitates to permit a visit to a tennis school, saying ``no one here wants to talk to a Westerner.'' In contrast, Yugoslavia seems as open as any West European country.

At the Automation and Control Engineering Factory in Zagreb, managing director Ljubomir Zubcic strides into the meeting room wearing a Burberry shirt. He explains how his company works with the West German firm Siemens to produce state-of-the-art measuring devices. ``We judge ourselves by the West,'' Mr. Zubic says.

This Western influence has a considerable liberalizing effect. When six dissidents were arrested in Belgrade a few years ago ``for defaming the state,'' critical articles appeared in many American papers. The dissidents since have been released. ``The authorities don't want a bad image,'' explains Belgrade-based civil rights lawyer Nicolai Berovic.

A decentralized power structure further limits authoritarian threats. Although Yugoslavia's communists don't share power with noncommunists, the parties in each of the six republics serve as checks on each other, almost like the American system of checks and balances between Congress, the Supreme Court, and the President.

Attorney Berovic offers an example of how the system works. The strict Bosnian authorities forbid free expression in the press; singing any song deemed ``nationalist'' can mean five years in jail. But just about any song can be sung without encountering legal problems in neighboring Serbia.

``In Yugoslavia, there are lots of groups fighting for power,'' Berovic says, ``and that creates room for freedom.''

Similarly, worker self-management promotes pluralism. All enterprises are managed by the people who work for them. In return for his labor, a worker receives both his wages and the right to participate in the decisions affecting the enterprise. The system reduces workers' alienation toward their jobs, a phenomenon common throughout the Soviet bloc.

But the system also has proved unwieldy and inefficient. In recent years, workers have spent more time governing at the expense of working. A recent study at the May 3rd Shipyard in Rijecka showed that workers could have constructed another two ships if they had not spent so much time on council deliberations.

``We realize things can't go on this way,'' says Danilo Mendenica, trade-union president at the Belgrade IKL Ball Bearing Factory. ``It is too inefficient.''

The decentralized power structure suffers from similar inefficiency. Each of the republics has built its own steel, chemical, and textile industries. The result is great overcapacity. And each of the republics grabbed whatever bank credits it could so that when the debt crisis hit during the 1970s, no one knew precisely how much all of Yugoslavia owed.

``We have created eight parallel markets,'' moans Croatia's Grubisa. ``We need to centralize more functions, create one market, one transport system, one post office.''

Without reforms, Yugoslavs see serious long-term dangers that could draw the country toward the Soviets. Jose Knez, vice-president of Slovenia's parliament, points to the country's declining competitiveness on the world markets. Because of poor quality and old-fashioned technology, Yugoslavia's exports to the West have plummeted in the past five years. At the same time, the Soviet Union, a less demanding customer than many Western nations, has become its No. 1 trading partner.

``We are falling behind technologically,'' Mr. Knez says. ``To remain independent of both blocs, we need to export more to the West and keep our ties strong.''

Despite agreement that economic reform is needed, such change remains politically sensitive. The federal government, run by a nine-member collective presidency, was designed to be weak in order to give regional interests a fair hearing. To take powers away from the regions would threaten an already delicate political balance.

Economic problems make changes extra difficult. In the last seven years, the country has been put on an austere consumption diet that avoided a default -- but which slashed the average living standard by 30 percent. In this atmosphere, few politicans want to take responsibility for letting money-losing factories go bankrupt or for tinkering with worker self-management. Fewer yet are willing to sacrifice regional perogatives for the common good.

``At the last party congress, everyone spoke like opponents to their own government,'' says Milovan Djilas, who was one of the three top communist leaders in and after World War II before breaking with the party in the 1950s and becoming its leading critic. ``Only no one proposed effective answers.''

In Mr. Djilas's view, Yugoslavia's problems have implications for both Eastern and Western Europe. He remembers how his country used to be a model for dissatisfied leftists.

French socialists such as Michel Rocard contemplated having workers own and manage companies. Czechoslovak Charter 77 members such as Jiri Dienstbier saw Yugoslavia as an example of a more pluralistic and prosperous communist society.

But these days, Djilas says, the East Europeans are looking elsewhere than Yugoslavia for guidance. Indeed, French socialists these days talk more about making businesses profitable, not about worker democracy. East European dissidents see China as more aggressive than Yugoslavia in its search to build an open, affluent communist state.

To become a model once again, Djilas says that Yugoslavia must create a more efficient form of socialism. His solution resembles Western European social democracy. Instead of letting workers just have a say in managing companies, he suggests they should be made shareholders and be allowed to profit directly from their success. Private industry should be boosted. At the same time, he believes that the country cannot become more ``Western'' without ending the Communist Party's monopoly on political power.

``We are in between the East and the West,'' Djilas concludes. ``We still have to decide.''

Fourth in an occasional series. The previous articles ran Sept. 19, Oct. 20, and Nov. 17.