down   III. Main Features of the Economic Reform  


1. Organizational structure  

During the 1950s the organization of the Czechoslovak economy was similar to that of the Soviet Union and the other East European Countries.

A four-tiered hierarchy existed:

(i) the planning commission at the top,

 (ii) branch ministries in the second tier,

 (iii) chief administrations in the third tier, and

 (iv) enterprises at the bottom.

The reorganization of 1958 made only one important change in this arrangement: in the third tier the Chief Administrations were replaced by the so-called Production Economic Units (Vyrobne hospodarske jednotky or VHJs). Unlike the chief administrations, which were organizationally part of ministries, the new VHJs had budget autonomy. The number of units in the third tier was also changed. Instead of 24 chief administrations, 383 VHJs existed after reorganization. Approximately one quarter were associations of enterprises, one quarter were so-called leading enterprises each having several adjoint enterprises and the remaining half were 'basic enterprises'.



The simultaneous existence of a 'shadow pyramid' made up of a hierarchy of the Communist Party apparatus and closely connected with the 'pyramid of the economic management' is peculiar to the Soviet-type command economy. Thus each position in the economic management pyramid falls under double subordination. First, it has to follow orders issued by superior bodies in economic management, and secondly, the corresponding positions within the party hierarchy interfere directly in its decision-making process. The Communist Party takes on an even more important role, since it holds the power of placement and replacement of people in the pyramid of economic management. Besides the obvious fact of overcentralization, interference of the Communist Party in economic matters at all levels of management causes inefficiency, since it imposes non-economic and sometimes purely irrational criteria upon economic decision-making.



No wonder, then, that a change in the organizational structure of the economy was regarded as a necessary pre-condition for the implementation of economic reform. A massive reorganization effort was therefore prepared and actually took place in 1965. It should be obvious that a hierarchical structure, including the existence of a ,shadow' pyramid, is incompatible with a market economy. Unless both of these pyramids are broken down, no real market can be created. This, however, did not happen. The hierarchical structure was not only retained but the economy was further concentrated into the fewer and larger economic units. Once more it was in the third tier of the hierarchy where the most important changes occurred. The number of VHJs was reduced to 99. Most of them were very large associations of enterprises called trusts - and only a few were independent 'branch enterprises'. Both trusts and branch enterprises were organized strictly on the 'branch principle' so that each of them had an almost total monopoly in its respective field of activity.

The creation of the branch enterprises and trusts, as it turned out, was unfortunate. According to the original intention, the branch directorates were to take over the functions of the economic ministries, most of which were to be abolished. This, however, did not transpire before 1968. The reorganization of 1965 therefore strengthened the higher levels of the economic pyramid, rather than provided freedom to the firms. It was inconsistent with the other proposed reform measures and thus was an obstacle to the reform's progress.



The only other important organizational change which took place before 1968 was the establishment of the State Commission for Finance, Prices and Wages (SKFCM). This Commission was created by merging the State Price Committee with the State Wage Commission and adding a small department for financial policy. The intention was to create a deliberately strong central body which would countervail the hitherto unlimited power of the Planning Commission by controlling all the 'market parameters'. The role of SKFCM was intended to be only temporary. Indeed, once the reform had proceeded far enough and the Planning Commission ceased to concern itself with the day-to-day coordination of the economy and began to think more in terms of real long-term planning, the SKFCM was dissolved into separate central boards for prices and wages.



The political changes of January 1968 resulted in a totally new approach to the problems of economic organization. The party accepted the idea that it should not interfere directly in economic management, especially not at the lower levels. The party retained the role of formulating the long-term economic goals and suggestions for economic policy, but would leave the implementation to the competent economic organs : The role of the party was redefined so that it was to refrain from any imposition of its own will on society against the will of others.

 'Decision-making concerning the plan and the economic policy of the State must be both a process of mutual confrontation and harmonization of different interests - i.e., the interests of enterprises, consumers, employees, different social groups of the population, nations, etc.' 16 

The enterprises were expected to be given true autonomy. This implied, above all, that enterprises would not be simply subordinated to ministries or other central organs; rather they would be more or less equal partners of the latter. Secondly, it implied that enterprises would be relatively free to decide on their own organizational structure as well as their membership in the associations. The Action Program said explicitly:

'The democratization program of the economy places special emphasis on ensuring the independence of enterprises and enterprise groupings and their relative independence from state bodies. ... The enterprise must have the right to choose its organizational pattern. Supra-enterprise bodies [like the present general and branch managements] cannot be imbued with state administrative power. The individual branches, with due regard to their conditions, must be transformed into voluntary associations... Enterprises must have the right to decide the activities of these associations, the right to leave them and become independent....’ 17 

It was recognized that medium-scale and small enterprises have a genuine and positive role in the economy and therefore that they should be allowed to exist. According to the dogmatic theory of the previous period, only the large-scale production units were thought to be efficient and useful, because supposedly only they could utilize modern advanced technology. A little common sense and a lot of unpleasant experience were sufficient to point out that there were some spheres of economy in which 'large-scale production' made no sense and where easy access to consumer and flexibility were much more desirable properties. Not too much speculation was needed to arrive at the conclusion that cooperative and private forms of business would be most appropriate for the small-scale enterprises. 
Full autonomy of enterprises also required that centralized appointment of managers must cease. Managers could hardly be independent in their decisions knowing that their superiors might choose to dismiss them any time. The system of workers' councils was deemed to be the only plausible alternative. Many economists, however, were reluctant to accept such a solution 18 because they feared that the domination of workers' councils over managers would lead to an 'Illyrian-type' inefficiency. This problem was widely discussed but no better solutions sought out.19 At last the conclusion was reached that the positive aspect of workers' councils, i.e., the true independence o enterprises from state and party bodies, was worth the cost of possible lower efficiency. As Benjamin Ward showed, the Illyrian system was less efficient than a capitalist market economy, but a socialist market economy with managers appointed by superiors might be even less efficient than the Illyrian economy. Another argument was brought forward, namely that the undesirable economic effect of workers’ councils could be minimized by restricting the role of workers' councils mainly to the elections of directors every four or five years and to making policy recommendations. In all other aspects the managers would be primarily responsible for the operation of enterprises. The importance of professional skills for efficient management was repeatedly stressed and the utilization of advanced methods and techniques together with modern managerial training were promoted.



The expected role of workers' councils can be best demonstrated by the following quotation from the provisional guidelines approved by the government in June 1968.

The following problems shall be decided by the Council of Working People:
(a) following consultations with a superior authority it shall nominate and recall the manager of the enterprise ....
(b) approve both the manager's salary and share in the enterprise's economic results in addition to the total amount of bonuses to be paid out to members of the management. . .
(c) decide statutory problems (membership in an association, mergers and divisions of enterprise and so forth) ... the management shall be duty-bound to project the Council’s decision into concrete measures.
If Council's opinion is contrary to management's, the latter shall propose its solution, together with the statement of reasons, to the Council. In the event of repeated failure to reach agreement management shel proceed according to its own proposals. 20



During the summer of 1968 workers councils came to the surface spontaneously. At the same time a controversy began over the draft o the 'Enterprise Bill' which intended to legalize their existence as well as to create a legal guarantee for the autonomy of the enterprises. Work on the enterprise bill gained momentum after the invasion due to expectations that it would help keep the economic reform alive According to the draft of the Enterprise Bill published in the spring o 1969, three forms of enterprises were to exist:

  1. Most of the enterprises were to fall into the category of 'public ownership'. Such enterprises were to be legally independent of state organs and be governed by workers'- councils, the majority of whose members would be elected from among employees of the enterprise with only a minority representing external bodies, such as ministries banks, other enterprises, etc.

  2. 'State enterprises' were to be directly controlled by the ministries, which would also appoint a majority of the members of the worker’s councils.

  3. Probably the smallest category of enterprises would be those established by other enterprises or organs. These enterprises would be owned by their founders who would appoint most of the council members.

This last form was developed to allow for the possibility of the establishment of new large firms independent of central authority. Provisions for the possibility of establishing small cooperative and private firms were instituted as well.



Another major change in economic organization was a direct consequence of the federalization of the Czechoslovak Republic. It is well known that one of the most powerful forces which helped to bring about the Czechoslovak Spring of 1968 was Slovak nationalism. Slovaks were rightfully discontented with twenty years of an 'asymmetric model' of state administration which gave them nominal representation but not true participation. Naturally, one of the first decisions of Dubcek's regime was to transform Czechoslovakia into a federation of two equal partners. This was accomplished on 1 January 1969 just four months after the invasion. The result of federalization was to split many bodies of economic administration, including the Ministry of Planning, Price Office, Statistical Office and several other ministries, into three parts - federal, Czech and Slovak. At the same time, however, the number of economic ministries was drastically reduced with the expectation that the burden of day-to-day coordination would be taken over by market forces.



The reversal of the reform process started during 1969. On 15 May the creation of new workers' councils was forbidden. Discussions about the Enterprise Bill were stopped and, of course, the bill has never been put into effect. Later in the year, the existing workers' councils were dismantled and a campaign for reconstituting the authority of party and state organs was launched. The following statement of party policy speaks for itself.

For the renewal of planned management of economy it is necessary to strengthen the organization of the economy from top to bottom. Above all, the state sphere and enterprises must be joined together into a single and united system, and the role of general and branch directorates must be considerably increased.21

The autonomy of enterprises began to dwindle, and they soon lost their organizational freedom. For all practical purposes the economy returned to the organizational structure created by reorganization of 1965. The only difference remained at the top of the hierarchy, and this was due to federalization. But before long the federal structure came into conflict with the effort to restore the command economy. Subsequently, the autonomy of many Czech and Slovak organs was limited and power was recentralized to the federal lupevel.



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