REFORMS  

CZECHOSLOVAK  ECONOMIC REFORM OF 1960'S

 

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(b) The Extent of Reform Measures

 

 
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The second crucial problem of reform strategy was to determine to what extent the initial reform measures were to be implemented. Two distinct alternatives were available: a 'trial' implementation of reform in a small number of selected enterprises - the so-called 'experiments' - or implementation of reforms simultaneously in the entire economy.
It is well known that the Soviet Union and some other East European Countries put great emphasis on economic 'experiments', i.e. applying the first strategy. The apparent rationale for experiments is that the risk and the social costs involved may be considerably diminished if the reform measures are first tested in a small number of cases before they are uniformly applied to all enterprises. Such testing can presumably reveal errors and inconsistencies and therefore help perfect the blueprint and eliminate unwanted effects.

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The 'experimental' approach was rejected in Czechoslovakia with little controversy. Once it was decided that reform was to be implemented immediately, no time was left for experimentation. However, even more important was the following argument: the aim o the reform was the radical change of the economic system and not only a replacement of some indicators by others. Therefore isolated experiments in some firms, leaving the rest of the economy untouched, would serve no purpose because of the impossibility of creating market-type behavior in the midst of the command economy environment. The proper environment for one firm can be created only when the reform is introduced simultaneously in all firms.
For clarification let us consider one aspect in which market and command economies differ most, namely price formation. Suppose that one firm were given a power to determine its own prices freely, while prices for all the other firms were fixed by the central authority. It is clear that because of the non-existence of effective competition, prices set by the experimenting firm would not reflect opportunity-cost and its income would be a result of its monopolistic position. Thus, the performance of the 'privileged' experimenting firms provided no reliable information for evaluation of the proposed changes in the whole economic system. There were some reports about 'experiments' during 1965 but these had very little to do with the economic reform proper and there were no expectations that positive results of these experiments would constitute a prerequisite for the implementation of reform measures in other firms.

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(c) The Speed of Reform Measures 

The rejection of 'experiments' does not necessarily imply that the transition from a command to a market economy ought to be done outright or over a very short period of time. Gradual implementation o reform is possible when individual institutional changes come about in succession, during a certain 'transition period', provided that each measure is applied simultaneously to all parts of the economy. The immediate implementation of all measures was understood to be impractical if only for the fact that conservative opponents were in position to prevent such a radical 'leap forward'. The initiators of the reform did not demand such a leap for two other reasons. First, they knew, as mentioned above, that a transitional period was needed for the elaboration of the final shape of the future system. Secondly, they were realistic enough to know that the economy would require some time for adjustment.

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The adjustments of production programs, technology or structure o exports all need a relatively long time. It is therefore desirable to make changes in policy parameters gradually, but within a clearly predetermined time pattern, so that the enterprises would have a precise idea about the expected changes from the beginning. For example, the differentiated 'surcharges' and 'subsidies' in foreign trade were expected to be cut by 20 per cent annually so that in five years this source of inefficiency would disappear. Knowing this, exporting enterprises would have sufficient time to make necessary changes. Similar approaches were also applied upon the unification of turnover tax. In this context 0. Turek wrote:

On the one hand the center must provide enough time to allow for adjustment processes in enterprises, and on the other hand, it must clearly demonstrate that the temporary deviations and the time pattern of their liquidation is determined by the center. This would help in creating a parametric environment for enterprises as soon as possible. Under these circumstances enterprises would be economically compelled to prepare long term programs aiming to improve their efficiency . 55

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The reformers, however, also realized that the transition period should be relatively short, not longer than 4-5 years. During the transition period, they argued, the system would be neither a command economy nor a market economy but rather a mixture of incompatible downelements from both. None of these elements would properly function in such a mixture. Too long a transition period would be therefore self-defeating: instead of improvement, an increase of internal conflicts would follow leading eventually to abandonment of the reform.
Developments during 1967 and 1968 confirmed these expectations. While compulsory production targets of the central plan were abolished prices still remained under very strong central control. This and many other remnants of the command system helped to create a situation in which the market had not really started to operate but the coordinative role of the central -plan was already considerably weakened. It was obvious that this was an unfortunate but unavoidable stage that ought to be overcome as fast as possible. Unfortunately , the tanks arrived before it could be accomplished, and so we shall never know how fast it would have been overcome or whether it would have been overcome at all.

 

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(d) The Sequence of Reform Measures

One of the most important lessons learned by the Czech reformers was that the success of reform depends greatly on the sequence in which the individual reform measures are implemented. If the one extreme, namely the instantaneous implementation of all reform measures had to be rejected as unrealistic, the other extreme - i.e. the gradual implementation of each measure separately - was rejected as well. According to The Principles of Accelerated Implementation the method of gradual change was unacceptable for the following reasons:

Gradual implementation would prolong the period during which decisions in enterprises are not yet subject to the influence of a socialist market; even though it may seem that gradual changes do not create risks, they do in fact only postpone risks to the future; the lengthy transition is inconsistent with the requirements of our economy, which needs a powerful stimulus to start a recovery and to increase efficiency as soon as possible; continuous changes of economic instruments would cause perpetual disturbances and result in a psychosis of provisionalities. The gradual changes would complicate the decision processes both in the center - which would have to change its decisions very frequently - and in enterprises, which would continue to work under incorrect criteria of efficiency. 56

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The contradiction between ' the unfeasibility of instantaneous solution and the undesirability of gradual implementation was resolved in the following way. A minimal set of crucial and mutually consistent reform measures was selected out of all the needed measures. Although this minimal set was not sufficient for the development of a fully fledged market and for the elimination of all the remnants of command economy, it was nevertheless designed in such a way that it would destroy the basis of the command system and make way for a revival of the market.
The most important idea of The Accelerated Implementation was that the minimal set of reform measures should be introduced simultaneously while all the other reform measures could be implemented gradually over the next several years to complete the transition toward the new economic system. This was emphasized by Ota Turek:

The internal consistency of rules and tools is important. This is a reason why the core of the economic reform must be created straight-away as the single crucial act of economic policy, . . . The point is that in one step a situation would be created in which the logic of an economic model will start to operate while the necessary deviations and compromises will have the role of disturbing elements that are to be eliminated in further developments. 57

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The aforementioned 'minimal set' consisted of the following four measures: (i) reduction of the number of compulsory targets to an absolute minimum; (ii) the abolition of the centralized allocation of producer goods; (iii) a considerable reduction of the number o centrally fixed prices; and (iv) the replacement of differentiated 'deductions' from profits and subsidies with uniform taxation.
Once applied together, the four measures listed above would allow firms to freely decide matters concerning their own production and technology and to choose partners on the market; make the net income of firms dependent purely on sales and not on fulfillment of plan indicators; establish through flexible prices a feedback system between producers and consumers; and guarantee that the central organs could not distort the market criteria for decentralized decision-making.
If one of the four were missing, the whole set would be inconsistent and none of the desirable effects would be achieved. Suppose, for example, that (i), (ii) and (iii) are introduced but instead of (iv) the old system of differentiated deductions and subsidies tied to the fulfillment of plan indicators is retained. In such a case firms would not be interested in meeting demand or in improving efficiency because they ould expect each increase in their income to be taken away from them and each loss to be covered by subsidy. The free setting of prices would be totally irrational under such conditions.
In spite of all the facts mentioned above, all four measures could not have been introduced at once. While (i) and (ii) were already instituted in 1966 it was generally accepted that (iii) and (iv) had to be preceded by the reform of wholesale prices and therefore had to be postponed until 1967-8.

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When prices began to be gradually freed during 1968 and the above-mentioned minimum set of reform measures was finally about to be completed, it became clear that to accomplish a true transition from the command economy another condition had to be met. In the reorganization of 1965 all industrial firms were concentrated by an administrative act into one hundred 'branch enterprises' or associations most of them having an almost 100 per cent monopoly in their respective branches. The autonomy of the firms within the association was in many respects restricted as the had to follow orders issued by the branch directorate. Under such conditions, the reform brought decentralization only to the level of associations. It was a very curious ,market game' indeed, played amongst one hundred large monopoly partners.
The economists finally realized that unless these administrative monopolies were dissolved and a truly competitive market created, no real improvement could be expected. They therefore added a fifth item to the minimal set of reform measures, namely (v) the organizational autonomy of firms.
Organizational autonomy was conceived as the right of firms to leave existing associations or to voluntarily establish new associations. In other words, it was determined that the power of the central authorities to organize or reorganize the economy must be restricted.

 

 

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(e) Concluding Remarks on Reform strategy 

The preceding sections described the main features of the reform strategy as it was developed in Czechoslovakia. It rejected partial experimentation and gradual progress of reform in favour of a relatively quick and simultaneous application of the most crucial reform measures into the whole economy. This choice of strategy depended on the reformers' specific perception of the market mechanism and command economy as mutually incompatible coordinative mechanisms.58 Unlike some Western economists who regard the pure market or decentralized system and command economy or centralized system as two idealized limiting cases with a continuous linear spectrum of real mixed systems in between, the Czechoslovak economists believed that the market and command principles are two radically different forms of economic organization which do not easily mix together.

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Their view of this dichotomy was derived partly from their own historical experience and partly from Wlodzimierz Brus' 59 influential book which gives an excellent analysis of the differences between centralized (i.e. command) and decentralized (i.e. market) models of socialism. Turek suggests that there exist three rather than two distinct economic systems and he calls them: directive model, transitory model and economic model. His characterization of these models is instructive:60

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 Directive
model
Transitory
model
Economic
model
Basic criteria for decision-makingphysical physical value
Share of centralized and decentralized decision-making 80:20 70:30 30:70
Form of implementation of central decisionsdirect order economic instrument regulated market mechanism

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The transitory 'model is apparently the system which was aimed at in the Czechoslovak reform of 1958 and in all other East European reforms including the Soviet Union but excluding Hungary. Turek, however, adds that the transitory 'model' is not really a true model or economic system because it is organizationally unstable and sooner o later 'will degenerate back to a directive system.' 61

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This opinion was also shared by other economists who believed the both a command economy and a market economy were, in a certain sense, 'stable' organizations, while the intermediate forms contain mixtures of command and market elements were unstable, and would tend to move either toward a command system or toward a complete market system. To use an analogy from physics, it looked as if command and market systems each had its own 'gravitational pull which could cause a return to the original system when only a small deviation from it was made. Once, however, steps in the direction the other system reach a certain border line, the gravitational pull of the other system prevails and the transformation could be accomplished. 

 

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The mechanism of the 'gravitational pull' can be described follows: Suppose that there exists a system with only a small number elements alien to it. The operation of such a system would not smooth, as the alien elements would cause friction, conflict, disequilibrium, etc. Naturally the tendency would be to improve the operation the system by replacing the alien elements with those that conform the system. Imagine, for example, a decentralization of investment decisions while preserving all other features of the command system Sooner or later difficulties would appear, as the coordinative role of t plan would be paralyzed without being substituted by a new coordinative mechanism. The recentrahzation of investment decisions in such a situation would seem to be an easy and effective way out. On t other hand, if a major part of the transformation into the market economy was already completed, the remaining elements of the command economy would likely be sooner or later eliminated.

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Nobody could determine exactly where the borderline between t two systems was. Some of the Czechoslovak reformers believed that the 'minimum consistent set of measures' the economy would moved close to it if not already across it. A speedy achievement of t 'minimum set' was therefore regarded as a crucial part of the reform

 

 

 

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