A sad history of folk music went like this: after liberation from the Turks, the folk music could be played in public places. With all the national romantism of the time, few composers took to making music (immediate classics) based on folk themes, while others started making popular music in the same vein - which lasted until WWII. The whole time this kind of music coexisted with waltz, foxtrot and whatnot; the kolo was danced on the king's court or at officers' balls.
Then the communists came to power and had two contradictory opinions on the matter. On one hand, the folks' music was mostly reactionary, drenched in tradition; on the other, the people were allegedly ruling the country and their music can't be all that bad. But the people deserve art!
The misshapen compromise was to artify the folk music. It was rearranged for the orchestras, sung by opera singers and while not too much was made in that line of production, even less of the rest could be heard on the waves. On the yet other hand, the folk music continued its life on the streets, village dances, weddings etc. The radio, and since the early sixties the television as well, kept sort of mum. The glaring absence of new folk music was getting too obvious, so the geniuses created first festivals of "music in the spirit of people's melos". Which stayed true to its ideal for a few years, and you couldn't tell the difference between old and new, ahem, newlycomposed folk music.
But then the sales of folk records took off, even sheet music was sold on kiosks, and lots of people started making that kind of music (the market forces worked a overtime in self managed socialism) and as the demand grew and grew, the standards kept falling. First went the metric of the lyrics; the traditional rhythms of the syllables were gone because the writers were now less than literate; next crept in more modern words which were never before found in there. Then not just the musical accent went out of sync with the syllabic accent, but the number of syllables as well - they didn't know how to substitute a word of proper length, or didn't even feel the lyrics were lopsided.
Then it all went downwards. General theft became fashionable - every wave was echoed in this new folk. First the mexican (very popular around 1964-66, from some mexican movies), then greek, then turkish and general arab/muslim music (including some echoes of their ululating style of singing, which is still the signature of most of today's folk singers), even rock and roll, why not.
In the early nineties, there was some hope that (domestic) rock may save the country. But no, the airwaves and the screens were mostly reserved for the yet another new wave of folk singers, now officially called turbo folk (as Antonije Pušić, aka Rambo Amadeus named them). They started opening their own discos, TV channels where they were predominant and nowadays they generally rule the scene for majority of audience.
Notable exceptions exist, though. Šaban Bajramović, deceased, is a kind of a pop icon around the world. Luis (also deceased) was the lone man with a synthesiser, yet his music was and wasn't turbo folk, he was on to something. And most of the brass music, topped with festival in Guča, follows the tradition in its own way. It's featured in many movies, and particularly carried by gypsy bands, which will appear just about anywhere on the street whenever they feel they could get paid. They'll follow a wedding party from city hall to the cars, or wait around the railway station to see if there's a doček or parting for someone. (19-aug-2014)
Update 2017: there's an interesting parallel with hip-hop. Though of completely different origins (ghetto vs nouveau riche villagers and worker/peasant types), they both express the aesthetics of a social layer which was not the mainstream for decades, use their own means of expression (i.e. steal tricks from colleagues or adopt/adapt from mainstream working those into their own matrix). They both spent decades as subcultures until they were gradually propelled into highly profitable layers of showbiz and used in politics.