IV. Social, Political and Economic Background
One of the most important things for a successful economic reform is the choice of a correct strategy, i.e. timing, extent, speed, and the sequence in which individual reform measures, or groups of such measures are introduced. Even if the social and political conditions make economic reform feasible, the wrong strategy may prevent it from ever reaching completion.
A specific strategy was developed in Czechoslovakia in the period 1964-8. It was only partly a result of rational considerations and agreement among reformers. To some extent it was a result of their more or less spontaneous reaction to conservative opponents of reform. Nevertheless, it is instructive to survey the main features of this strategy as it proved to be quite effective.
(a) The Timing of Reform Measures
The choice of the time in which reform is to be implemented may be essential for its success. Two apparent alternative strategies existed: either a very quick preparation of rough reform proposals and their immediate implementation, or a slow and detailed elaboration of proposals with very careful selection of proper time for implementation.
The first strategy may seem a hasty and not very serious approach to reform. Paradoxically, it may in some cases be much more effective than the latter, because a delay in implementation may considerably weaken the strength of reformist forces.
Janusz Zielinski argues that there is usually little time for preparation of reform on paper: "Design of reforms frequently encounters an interesting vicious circle. Without pressure, no extensive and far-reaching work on a new system is carried out. Under pressure, reforms must be initiated without waiting for a detailed blueprint." 52
The Hungarian reform is sometimes considered an example of the second strategy. The length of time devoted to the preparation of blueprint in Hungary, in particular, is frequently contrasted with the hasty implementation of reform in Czechoslovakia. But was it really so? R. D. Portes describes the process in Hungary: ". . . The reforms were carefully prepared. The Central Committee decided in December 1964 to initiate full-scale discussion but no significant changes were made until January 1968." 53
While the actual implementation of the reform in Hungary apparently started with a more complete blueprint than in Czechoslovakia, the difference does not seem to be primarily in the amount of time available but rather in the fact that the opposition against the reform was less strong in Hungary than in Czechoslovakia. The work on the proposals for the Czechoslovak economic reform was initiated in the last quarter of 1963, and the really important changes started only in January 1967. Thus Czechoslovakia devoted approximately the same amount of time as the Hungarians to the preparation of the reform. In Czechoslovakia the views on the timing of reform were polarized. The conservatives resented any risky moves to 'unknown territory' and demanded therefore that no changes be made before it was theoretically proved beyond any doubt that every proposed change is workable, would improve the economy and would not contradict socialist principles. They also asserted that practical implementation may start only after all the details of a consistent blueprint are elaborated.
The reformers, or at least the more radical among them, clearly preferred the strategy of almost immediate implementation. They were afraid that too long a delay could well kill chances for reform. Favorable social and political conditions might disappear and the authorities might decide that the old system was still adequate and merely in need of partial improvement. This argument may have been correct. The economic stagnation of the early 1960s, which created a favorable atmosphere for reform, was strengthened by the rigidities and inefficiencies of the command system but in principle was a part of the economic cycle. In the middle 1960s the economy had resumed growth before any significant changes in the system were completed. Fortunately the old system was already so discredited and the ideas of the new system so generally accepted that the improvement in the economy did not hinder continuing efforts to reform it. Had the theoretical preparation for the reform taken one or two years longer, the probability of reform proposals being accepted by political bodies would have been considerably smaller.
The radical reformers also maintained that it was impossible to blueprint the whole economic system onto paper in its final and optimal form before actually putting it to work. It is therefore preferable to commence implementation prior to shaping a final blueprint and thereafter continuously make adjustments according to the experience obtained during each stage of the reform.
This argument was especially relevant to the situation in Czechoslovakia, where the blueprint for reform was a product of compromise between progressives wanting radical reform and conservatives looking only for partial improvements. It was believed that the success of the first steps would serve to convince conservatives that more radical steps should follow.
And this was what actually happened. A detailed analysis of articles, books and other texts published during the period 1963-8 readily reveal the surprising extent to which the original ideas had been transformed.
The main controversy about timing of implementation was related to the problem of inter-industry structure and allocation of investment. It was accepted by both sides that the disequilibria and inefficiency of the Czechoslovak economy were in a great degree a result of distorted industrial structure, which was in turn caused by misallocation o investments in the early 1950s. The restructuring of the Czechoslovak economy was held to be necessary for a smooth operation of the new economic system.
The economists, however, were sharply divided in their views on the best way of correcting the distorted industrial structure.
The conservatives argued that the introduction of the market mechanism at a time when the economy was in deep disequilibrium would inevitably lead to chaos and inflation. They therefore wanted to postpone the implementation of reform until after equilibrium had been restored and the industrial structure corrected by the existing tools of command planning.
The radical reformers disagreed. They argued:
(i) The state of the economy was so bad that Czechoslovakia could not afford to retain a command economy for another ten years. Such a period would be needed for the preparation of investment plans, the reallocation of investments and the building up of new production capacities.
(ii) The attempt to restructure the economy while leaving the command system intact, would very likely result in an increase in the share of investment in the national income. This would amplify rather than alleviate tensions in the economy and thus make the restoration of the market even more difficult.54 Substantial reduction in the total amount of investment was needed if the equilibrium between the aggregate supply and aggregate demand was to be achieved.
(iii) The determination of the optimal industrial structure under a command system is virtually impossible for the following reasons: (a) The command system, unlike the market system, does not generate the correct criteria for the allocation of investment. The misallocation of investment in the 1950s was, among other things, the result of the fact that prices lost their parametric function. (b) The specific pattern of investments from the 1950s, which included a preference for heavy industry, was to a certain degree a predictable result of the inner logic of the functioning of the command system. It would therefore be very difficult drastically to change the investment pattern without first changing the nature of the economic system itself.
(iv) The existing imbalances in the economy resulted from the peculiar behavior of the firms under a command system. The transition to a market economy would prevent firms from continuously hoarding stocks of raw materials and intermediate products, from producing an assortment of goods which did not correspond to demand, from wasting scarce resources by using inefficient technologies, and from demanding overly large investment. Such consequences could very quickly reduce excess demand and move the economy closer to equilibrium even before any reallocation of investment took place.
The above arguments were so powerful that many economists, planners and politicians of a previously conservative leaning were persuaded and agreed that the reform should be implemented as soon as possible. This turning point occurred in 1966 and the Principles of Accelerated Implementation of the New System of Management were the result. It also led to the acceptance of the computerized method for the general revision of wholesale prices. It would have taken three or four years to recalculate all the wholesale prices by the traditional method of price calculations. With the help of computers this time was shortened to less than one year.