III. Main Features of the Economic Reform  





2. Planning  

In the pre-reform years the system of central planning primarily played the role of a short-run coordinating mechanism as a substitute for the market which was not in operation. Consequently, (i) short-term (annual) plans were much more important than medium term (five-year) plans and long-term plans did not exist; (ii) plans were prepared by quantitative balancing in physical terms (balance-sheet method) without proper regard to efficient allocation of scarce resources; (iii) the state plan prescribed obligatory targets for each particular enterprise; and (iv) the degree of fulfillment of those targets was the only criterion for enterprise performance.




The economic reform of 1958 made almost no change in the role and methods of planning. The superiority of the central plan, as well as the obligatory character of its targets and desirability of their fulfillment, were not questioned. The only problem which remained was to find the best incentive system which would stimulate enterprise managers to follow the centrally prescribed indicators. Planning, or 'rational' central management of the economy, was still regarded as a primary goal of a socialist society, and Soviet-type planning was seen as the only authentic form of planning.



This view was later considerably changed. First, it was argued that planning should not be a goal in itself, but rather the means for achieving true humanistic ends. Secondly, it was argued that Soviet-type planning based on an extensive system of balance sheets in physical terms without using proper economic criteria had not been able to determine efficient production programs and keep the economy in equilibrium. Thirdly, it was shown that preoccupation with day-to-day coordination of economic processes made the Planning Commission incapable of providing true long-term guidance of the economy. 
It would be wrong, however, to conclude from this criticism of Soviet-type planning that Czechoslovak reformers wanted to eliminate planning altogether and replace it by a pure market mechanism. Although they rehabilitated the market mechanism theoretically, stressing its superiority as an automatic regulator for short-run coordination, they were nevertheless well aware of its faults and limitations, especially in the long-run. They did not believe that a pure market system can guarantee optimal and socially desirable long term development of the economy.



The new economic system proposed by the Czechoslovak reformers can therefore best be characterized as a 'guided market system'22 in which the market is used as the short-run coordinating mechanism while in the long-run the economy is guided towards the desired social goals by central planning. 
This, of course, immediately raised the question of the mutual compatibility of market and central planning, which was extensively studied and discussed.23 The conclusions could be briefly summarized as follows: the long-term plan should choose the optimal path of development from among the set of expected feasible paths. It should not, however, be forced directly upon the economy but rather should serve as a base for the economic policy of the central organs and provide pertinent information for decentralized decision-making. The expected role of planning in the new economic system was apparently very close to the concept of indicative planning developed in France and some other West European countries.



As already mentioned above, this concept of planning was not fully incorporated into the first version of the reform proposal known as 'Main Directions', which treated the market more or less as a supplementary device for implementing the plan. 'Main Directions' also assumed that the whole clumsy system of annual planning based on thousands of interrelated material balance sheets would be preserved even though the targets would not be binding for individual enterprises. Nevertheless, the importance of the fact that according to 'Main Directions' fulfillment of planned targets ceased to be a success indicator ought not to be underrated. The Principles of Accelerated Implementation went discernibly further in the reformulation of the role of central planning:

The economic plan . . . must have character of an aggregate conception of economic development, which will guarantee correct orientation of enterprises. .. and must provide a binding framework for the economic policy of government which will be implemented through centrally controlled financial, credit, income and price policies and if necessary, also by obligatory targets of the plan.24




The 'Principles' also indicated that it may not be desirable to disaggregate the central plan into specific targets and quotas.

The requirement of flexible planning is especially urgent in the period of implementation of the new economic system. With regard to that, it will be conducive to limit work on the Fourth Five-Year Plan and use it only as a framework for central economic policy without predetermining binding allocations of investments, labor force and other resources by the traditional breakdown of the plan.25

The above argument was not, however, applied to the annual plans. During 1966 and 1967 the detailed annual plans continued to be elaborated by the Planning Commission and their targets were, as before, broken down for individual enterprises. Except for approximately fifty specified production quotas, the indicators of the plan were legally only recommendations.



The formal change in the character of plan indicators did not have an immediate effect on the behavior of firms. The managers did not have enough experience or information to determine their own production program apart from recommendations of superior authority. The formally 'non-binding' targets therefore played at the beginning a very similar role to the binding targets of the command system. This inertia was, however, only temporary. The rapid development of market channels providing information about demand, the spreading of marketing techniques and adjustments of decisions-making rules in the firms, promised that managers would quite soon be able to respond to the signals coming from the market and adjust their own production plans. In fact, it was observed that those firms with well-educated and flexible managers did very well, attracted large demand, and substantially improved their income situation. On the other hand, the enterprises shackled with rigid management continued to operate in the accustomed ways, following only the prescribed targets, and a few of them began to experience difficulties resulting from the stockpiling of unsalable goods. 
The fact that indicators of annual plans remained de facto obligatory had yet another reason: the hierarchical organizational structure with the system of appointments from above was preserved. The planning commission, ministries, and branch directorates still remained so powerful that enterprise managers frequently chose to follow the 'recommendations' from above even though they were not legally bound to do so.



This persistence of the command character of planning despite all the attempts to terminate it led Czechoslovak economists to investigate further the problem of mutual compatibility between market and planning. It is worth mentioning some of their conclusions:

(i) The plan should be a model for the expected market situation in the future.

'The concept of planning as a model for the future market is quite compatible with a socialist economy. When there is no need to set a course of accelerated industrialization, the plan can speed up advance towards natural market equilibrium and be an optimal plan in the economic sense. '26

(ii) It is desirable to separate technical and political components of planning decisions.

'The task of the technical component of the planning process is to prepare for the political component an explicit formulation of . . - alternatives, i.e. alternative projections of social and economic development for a given period. . . . Experts are responsible mainly for the feasibility of submitted alternatives. . . . The role of the political component of the planning process is to choose among the submitted alternatives. . . . This choice is an application of the effective preference function of society. . . . An adequate expression of the interests of the whole society ... needs a political system with maximal and most direct democracy." 27

(iii) Optimality of the plan is a precondition for the combination of planning with market.

'It is possible to create conditions under which enterprises behave in harmony with the optimal economic plan purely on the basis of their economic interests without the necessity of administrative compulsion. . . . Only the optimal plan, however, has these properties. A non-optimal plan must be either implemented through administrative methods or it remains an unimportant document. On the other hand, it is obvious that the enterprise behaviour which would be rational from the point of view of the whole society as well as the construction of optimal plan itself is impossible without a system of management based on economic principles." 28

(iv) Annual central planning must be terminated and the work of the Planning Commission should be devoted to medium and long-term planning. As long as the Planning Commission continues to elaborate detailed annual plans on the basis of thousands of balance sheets it is tempted to impose its plans on enterprises and allocate scarce resources accordingly. Conflict with the arising market forces would be inevitable. The Planning Commission would also be distracted from its true role of long-term guidance of the economy.



At least the first part of the fourth principle was accomplished. Annual central planning was abolished in 1968. Instead of a detailed annual plan, the central authorities merely issued so called 'Economic Guidelines' concerning economic policies of the government and the expected volumes of output in different branches of economy. Enterprises were supposed to utilize the information contained in the 'Economic Guidelines' for preparation of their own plans.

No mechanism was devised to ensure automatically that the sum of individual plans of enterprises equaled the branch targets given by guidelines. No wonder, therefore, that discrepancies developed, especially after the shock of the Soviet invasion brought the Czechoslovak economy to the edge of recession. The smooth operation of such a system would have required a much more effective self-regulating market mechanism and very sophisticated monetary, fiscal, income and price policies. The market mechanism was only beginning to revive in 1968, and the developments of 1969 reversed the process. Given the growing tensions and scarcities, and perhaps the anticipation of a return to command economy, enterprises resumed the behavior, peculiar to the Soviet-type system. They demanded more inputs, investments and labour and wanted to produce less than was feasible according to central calculations.

Hospodarske noviny described the situation in the middle of 1969:

"The comparison of the government's economic guidelines for 1969 and the information about the plans of enterprises showed considerable discrepancies. . . . The realization of the plans of enterprise would lead to the further widening of the gap between personal incomes and physical supplies to the internal market, as well as in the sphere of investments. . . . The sum of the plans of enterprises compared with the economic guidelines represents:

  • lower industrial output

  • lower supplies both for the internal market and for export

  • lower labor productivity and a higher rate of growth of wages

  • considerably higher requirements for capital building....

The views of enterprises on the way of financing investments is characterized by the following survey :


  Guideline Plans of
Subsidies from the state budget 18.5 14.4
Self-financing 44.1 47.7
Credit 37.4 37.9

It is understandable that the federal government as well as both national governments could not passively tolerate these facts ...." 29



And actually, the government and the party responded by attempting to 'raise the authority' of the central plan, but were still hesitant to restore command planning to its old form. In the middle of 1969 the 'agreements' between the enterprises or associations and the central body were devised to handle the situation. In such an 'agreement' enterprise or association committed itself, supposedly voluntarily, to increase its own output or to save on its inputs and thus to help restore equilibrium between supply and demand.

The agreements existed on two levels: (i) between ministries and branch directorates, and (ii) between branch directorates and enterprises. Two aspects were apparently stressed in the agreements: increased supply to the internal and foreign markets and limits on the growth of wages.30

In 1970 the revival of annual planning took place. Once more it was claimed that this was not a step back to administrative planning and that the targets of an annual plan were not directives of the old type. At the same time, however, the plan was interpreted as being binding. For example Minister Karol Martinka made it absolutely clear that:

"Today we unanimously accept the idea that the plan must be binding and that it will determine the decisive tasks for the proportional development of national economy. Direct methods o management of economic development will remain a permanent part of the management of the socialist economy.."31

"And the Central Committee of the Communist Party resolved that the role of the national plan as a basic instrument of purpose management of economic processes must be revived. The most important targets must be binding ...." 32

Although binding, the plan did not yet have legal force. During 1970 the system of 'agreements' was still used to enforce it. It is likely that some bargaining preceded the acceptance of targets by firms. However, considering the mass purges and dismissals which did not exclude directors of enterprises, their bargaining power was probably minimal.33

The last remnants of the economic reform were removed in the years 1971 and 1972. The 'balance sheet' method was revived for at least 450 basic productS,34 and the obligation to fulfill targets of the state plan was enacted into law. The degree of fulfillment of targets was once more made a basic criterion for evaluation, and the system of incentives and sanctions was adjusted to it. The system of Material-Technical Supplies with the central allocation of basic resources and products was also revitalized.




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