REFORMS  

CZECHOSLOVAK  ECONOMIC REFORM OF 1960'S

 

down

 III. Main Features of the Economic Reform  

 

5. Success indicators  

 

up
down

The search for better success indicators has been perhaps one of the more important task of many recent East European economic reforms. It was also true for the Czechoslovak economic reform of 1958 but not for the more recent reform. The reason lies, of course, in the fact that the second economic reform meant to provide true autonomy for enterprises rather than merely develop more sophisticated methods of central manipulation

up
down

It is well known that the main criterion for evaluating performance of enterprises and for the distribution of bonuses to managers in the Soviet-type economies has been the degree of fulfillment of the obligatory targets prescribed by the annual central plan. Probably the most important among the many adverse consequences of such a system has been the deliberate distortion of information. The central planners, facing permanent shortages of all important raw materials and investment goods, have always imposed very tight plans on enterprises, demanding maximum output with a minimal quantity of inputs. This has made the life of managers in enterprises very difficult. Any irregularities in deliveries or any random disturbances could cause underfulfillment of planned targets and consequently a loss of bonuses. For their own protection managers began to hoard raw materials and semi-products and tried to create and conceal reserves of productive capacity and labor force. For that purpose they always demanded more inputs than they actually needed and pretended that they could produce less than they actually could. They have also never fully utilized the possibilities of new innovations, being rightly afraid that as a response to their improved performance, central planners would demand even more in the next year's plan.

up
down

The above-mentioned problems were already correctly identified during the preparation of the first economic reform. In 1958 the solution was sought in the change of success indicators and incentive schemes. First of all, the number of success indicators was considerably reduced and the managers' feelings of uncertainty were to be eliminated by keeping the so-called 'long-term norms of material incentives' constant for the whole five-year period. Secondly, the incentive schemes were adjusted to provide large bonuses not only for overfulfilment of plans, but also for voluntary acceptance of higher targets. The rates were carefully calculated in such a way that the bonus for 100 per cent fulfilment of a tighter plan would be higher than a bonus for high overfulfilment of an easy plan. It was expected that this new system o incentives would work as a built-in automatic regulator against the tendency to distort economic information. Unfortunately, this scheme was abandoned too early so that evaluation of its effectiveness is impossible.

up
down

On the eve of the second economic reform the distortion of information was once more identified as the crucial problem of the Soviet-type command economy.45 This time, however, a very different solution was proposed. The only natural success indicator in a market economy is an income actually earned from sale of products and services. The fulfillment of targets prescribed by the central plan therefore ceased to be a success indicator in 1966 and formal reporting and checking of the degree o plan fulfillment was eventually also abandoned. This change was accompanied by a radical restructuring of the incentive system. Before the reform, the wage fund and the total amount of bonuses for managers depended solely on the degree o fulfillment of planed indicators regardless of the actual earnings of the enterprise. For example, if the actual gross value of output of a given enterprise was 5 per cent above the planned level, the enterprise was entitled to pay 5 per cent more than originally planned for basic wages, and the necessary funds were automatically released by the state bank. If the revenue from sales was not sufficient, the enterprise automatically received a subsidy from the state budget.

up
down

The same principle was applied to bonuses or 'premium funds'. These funds were also automatically provided by the state bank according to the fulfillment of planned indicators and if the enterprise did not have enough of its own earnings it received a subsidy. There existed a certain system of 'profit sharing', but this was dependent on the targets of the central plan. For example, the enterprise could have received a 5 per cent share in planned profit and a 30 per cent share in unplanned profit. Once more the prescribed amount of planned profit was the crucial variable here. This situation was totally changed by the economic reform. Under the new arrangements enterprises had to apply their own income for the payment of wages and bonuses. It was still possible to borrow from the state bank or to ask for a subsidy from the state budget, but no allotment of funds came about automatically with the fulfillment of the planned indicators.
This substantial difference was sometimes obscured by the disputes about the nature of success indicators in a socialist market economy. It is usually assumed that firms in a capitalist market economy maximize profits. Taking into account the Yugoslav experience, some Czechoslovak economists argued that in the absence of private ownership, socialist firms would maximize 'gross income'46 rather than profit. The proclamation of gross income as a success indicator was then incorporated into the reform blueprint, against the minority view which maintained that profit should remain a success indicator even in a socialist market economy.

 
up
down

In spite of this unsettled question it is necessary to stress that the change in the role of success indicators was really profound. Gross income ceased to be a planned indicator or obligatory target in the old sense. Enterprises were expected to maximize income because by doing so they could increase wages and bonuses or invest more than before. But the allotment of financial funds, wages, bonuses, etc. was not dependent on the ratio of the actual and planned gross income. It is apparent that the new arrangement of the incentive system also required the overhaul of fiscal instruments. In the old system, all the profits remaining after the subtraction of shares to be retained by enterprises were transferred to the state budget or in the negative case subsidized from the state budget. Because wages, bonuses, and other incentive funds were determined independently of the actual income from sales, the rates of transfers to or subsidies from the state budget were very differentiated. Each enterprise had its own individual tax rate, which was valid only for a given planning period. In other words the central bodies freely exercised their power to redistribute income among the subordinate economic units.
Such a system is, of course, absolutely incompatible with a market economy. It was quickly recognized that market incentives and success indicators require a uniform system of taxation and almost total elimination of subsidies. Otherwise the enterprises could not be expected to behave rationally. This was categorically stated in The Principles of Accelerated Implementation:

"The effective operation of the new system of management require ... uniform taxation ... The system of taxation together wit market forces provides room for rational decision making i enterprises and creates objective economic criteria for it ... The system of taxation creates a basis for the evaluation of economic efficiency in enterprises. If the taxation is uniform, and prices tend towards equilibrium, well-run enterprises are clearly and objectively distinguished from inefficient enterprises ... This function cannot be accomplished b differentiated taxation." 4 7

up
down

The transition to the new fiscal system began in 1966. However, the uniformity of tax rates could only be achieved after the general revision of wholesale prices in January 1967. From that time the following three basic forms of taxes existed: (i) capital charge - 6 per cent from fixed funds and 4 per cent from working capital; (ii) tax from the gross income of enterprises - 18 per cent of income, net of capital charge; (iii) stabilization tax - as described above.
The next change in the fiscal system appeared in 1969, when the taxation of gross income and stabilization tax were replaced by separate taxes from profits and from the volume of wages. This change did not yet represent a step back from the reform, because it had been in preparation in 1968 and the uniformity of tax rates was still maintained.

up

down

It is not difficult to understand why this change was made. Although the tax from gross income is calculated from both wages and profits, it is paid out of profits only. Because wages are relatively stable and represent a very large portion of gross income, the net profits after tax become extremely sensitive to fluctuations in gross profits. In particular, any positive increment of profit is taxed only by a relatively low tax rate so that most of it is retained in the enterprise. If profits instead of gross income are taxed, the tax rates would be much higher (50-60 per cent) and therefore a much larger share of any increment of gross profits would go to the state budget.

up
down

The real retreat from the reform started in 1971. The aforementioned attempts to ensure the binding character of annual plans naturally resulted in the return to old-fashioned success indicator. Fulfilment of obligatory targets again became the main criterion evaluating enterprise and managerial performance. The adjustments of the incentive and fiscal systems required more time. Nevertheless, the retreat from the principle of uniform taxation was clearly formulated already in 1971:

"While the taxes which have criterial function" 48 ought to be in principle uniform, the taxation of incomes must be necessarily differentiated, because they serve to coordinate creation of disposable resources with planned requirements. The taxation of profit ... must be a flexible economic instrument ... The relation to the State budget will therefore be established through differential rates which will be essentially dependent on the planned requirements for a given industry." 49

up
down

The move toward differentiated taxes together with the increased rate of subsidies demonstrated that the central authorities regained some of their power in the redistribution of income. But even that was not enough. As Cima indicated, the next step would be "Abolition of tax form and its substitution by the system of transfers to the State budget." 50
Both success indicators and the fiscal system were finally remodel to fit the renewed Soviet-type command economy. The last thing to be done was to link the incentive system to the success indicators.

 "Great attention must be devoted to enhancement of personal material incentives ... Especially an increase in the share of incentive fund being considered. It will be necessary to link the withdrawals from these funds more closely to the fulfillment of such indicators as, for example, planned profit, total cost, reduction of material consumption, etc." 51

 

 

 

 

 

 

OK Economics was designed and it is maintained by Oldrich Kyn.
To send me a message, please use one of the following addresses:

okyn@bu.edu --- okyn@verizon.net

This website contains the following sections:

General  Economics:

http://econc10.bu.edu/GENEC/Default.htm

Economic Systems:  

http://econc10.bu.edu/economic_systems/economics_system_frame.htm

Money and Banking:

http://econc10.bu.edu/Ec341_money/ec341_frame.htm

Past students:

http://econc10.bu.edu/okyn/OKpers/okyn_pub_frame.htm

Czech Republic

http://econc10.bu.edu/Czech_rep/czech_rep.htm

Kyn’s Publications

http://econc10.bu.edu/okyn/OKpers/okyn_pub_frame.htm

 American education

http://econc10.bu.edu/DECAMEDU/Decline/decline.htm

free hit counters
Nutrisystem Diet Coupons