For Reformers, Costs of Capitalism Are Steep. YUGOSLAVIA: REVITALIZING THE ECONOMY

IT'S not easy to reform a communist economy. And Yugoslavia, which is further down the road to reform than most of its neighbors, is finding many pitfalls. The country junked Moscow-style central planning in 1948, when Josip Broz Tito snubbed Soviet leader Joseph Stalin, and started experimenting with market forces. Last March, when the new prime minister, Ante Markovic, was appointed, he pledged a wholesale return to capitalism.

Foreign investors have since been allowed to buy Yugoslav companies. Private enterprise has been freed from bureaucratic hassles. Restrictions have been dropped on hard-currency imports and bank withdrawals. The country's shop shelves are bulging, and Yugoslavs seem better off than neighbors in other East European nations. Still, most diplomats, economists, and ordinary Yugolavs are pessimistic.

Despite the availability of consumer goods, the Yugoslav economy is bankrupt, laboring under the weight of a 1,000 percent annual rate of inflation, more than 17 percent unemployment, and $20 billion in foreign debt. Real living standards have plummeted in recent years to 1965 levels.

Putting that mess in order seems beyond the reach of the most energetic reformer.

``Everything Markovic says sounds so good,'' says a Western diplomat. ``But there's a big gap between laws and reality - this country doesn't run on laws.''

``Markovic has good economic ideas,'' adds Milovan Djilas, a founder of modern Yugoslavia who became a celebrated dissident when he attacked the system in the 1950s. ``But politics will sabotage them.''

All East-bloc reformers recognize the central fact that a free market truly is free only when companies can avoid blatant interference by the Communist Party. The party must not be allowed to pick or at least approve company managers, direct investment, and bail out inefficient companies, all for political reasons, they say.

This fundamental problem is aggravated in Yugoslavia by two additional factors: an inefficient ``worker self-management'' system and an explosive ethnic mix. The Western-looking northern republics of Slovenia and Croatia are locked in conflict with the more backward Eastern-looking southern republics led by Serbia and its strong man, Slobodan Milosevic.

In contrast to other communist regimes, the central government has little authority in Yugoslavia's system of federalism. Prime Minister Markovic, a Croatian, so far has proved reluctant to take on Mr. Milosevic and ask for more political power to restructure the economy. Critics fear this inaction means that local politicians will kill reforms by keeping open unprofitable firms.

``Economic reform needs political reform,'' says Pero Sparavaz, an economic adviser in the Federal Secretariat. ``But Markovic has not asked for increased powers.''

The Federal Economics Ministry admits that more than half of Yugoslavia's enterprises are technically insolvent, with accumulated debts of about $15 billion. Closing them will mean increasing unemployment. It also means curbing the excesses of local banks which fuel inflation by printing money to cover company losses.

Perhaps even worse, the lack of control over the local politicians results in rampant corruption. In one celebrated case last year, a Bosnian agrobusiness, Agrokomerc, flooded the banking system with almost $1 billion of falsified promissory notes.

``All the politicians support reform in words but not in deeds,'' says Kosta Cavoski, a Belgrade political scientist. ``They all say, `Sure, close down unprofitable firms, but not in my own republic.'''

Wealthier northern republics are more willing to accept the market's verdict than are the poorer southern republics, he adds. ``True economic reform perhaps means letting 10 percent of Slovenian firms go bankrupt and 80 percent of Montenegrin firms. No Montenegrin politician, even the most reform-minded, would accept that sacrifice.''

An additional problem is the country's vaunted system of worker self-management. Unlike in other communist countries, the state doesn't own firms; workers do, exercising control over management decisions through a workers' council.

Instead of investing company profits, workers have tended to take surpluses in greater wages. Forced to manage by ``consensus,'' factory directors find themselves unable to adapt to changing market conditions. Even worse, workers go over their heads and appeal directly to politicians, who often step in and bail out inefficient enterprises.

When drafting the new reforms, many suggested abolishing the workers' councils. Although the ruling Communist Party reduced the councils' ability to interfere with management decisions, it couldn't bring itself to take such a radical step.

These problems hold ominous messages for potential communist reformers everywhere. Adopting well-meaning laws won't result in overnight prosperity. Instead, it means closing factories, accepting more unemployment, and perhaps even higher inflation.

``There's a recognition here that communist ideology is bankrupt, and that we need to replace it with Western capitalistic methods'' concludes celebrated dissident Djilas. ``The problem is that this transition is difficult to make.''

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