REFORMS  

 

 


PROBLEMS AND PROSPECTS  OF CZECHOSLOVAKIA’S

NEW ECONOMIC MODEL

 by Harry Shaffer

Osteuropa, No.3,1968 (German version)

Jan S. Prybyla ed.: Comparative Economic Systems, Appleton-Century-Crofts,
New York, 1969 (English version)

 

…None of the countries that embarked on a Marxist-Leninist course was less suited for such an economic system than Czechoslovakia... But Czechoslovakia had had long years of experience with democratic institutions during the interwar period and she entered the post World War II era as an already developed country. Yet, during the years of postwar reconstruction, the economy performed quite satisfactorily …

By 1960, Czechoslovakia began to run into economic difficulties. … During the early 1960’s, Czechoslovakia’s economic growth slowed down to a snail’s pace, and in 1963 Czechoslovakia …[had] an actual drop in building construction, industrial output, national income and real wages.

It became ever more apparent that the system of administrative central planning of all the micro aspects of economic activities was ill suited for the efficient performance of an industrialized economy such as that of Czechoslovakia. … work on a "new economic model," as it came to be called, was started. The details of the model were worked out by a group of experts headed by Ota Sik. The fundamental outlines were oficially approved by the Party in January, 1965; during the following months, the new economic model was tested in hundreds of enterprises; on January 1, 1966, some of the measures provided for by the model were put into operation; and on January 1, 1967, the entire new system of planning and administration was introduced (although not immediately Fully implemented) in all branches of Czechoslovak industry.

Czechoslovakia’s new economic model entails a substantial degree of economic decentralization, a corresponding increase in the decisionmaking power of enterprises, a greatly enhanced role for profit as a measuring rod of enterprise efficiency and as the base for incentive premiums, and an extensive utilization of the market forces of demand and supply. More specifically, the new economic model called for a substantial decrease in the number of indicators to he prescribed from above - a change from obligatory indicators to "recommendations" from the center and the replacement of direct methods of central administration (commands) to indirect ones (monetary and fiscal policies such as credit controls); a wholesale price reform, intended to bring wholesale prices up to average costs of production; a gradual enlargement of the sphere of "free" prices; an enhanced voice for enterprises within the concerns and trusts of which they are a part; a rapid diminution of centrally financed investments; the establishment of economic accountability ... for each industrial enterprise and greatly increased emphasis on material incentives for workers and managers. In essence, the far reaching economic reforms, as now introduced or at least planned, amount to an attempt to widen the role of the market and of material incentives within the framework of a socialist economy—in other words, to a compromise between central planning on the one hand, and the market and individual initiative on the other. …

To Czechoslovakia’s economists, the rationality of the new economic model seemed impeccable, and most Western experts agreed. …. But if the new system’s advocates thought that there would be smooth sailing, and that economic results of its introduction would he spectacular and immediate, they were mistaken. It soon became evident that the dismantling of an administratively guided system is not all that simple, that old habits are not readily changed, and that it is easier to construct a model than to establish the conditions that make it apply as originally intended. By fall, 1967 there was no longer any doubt: the new economic model was in trouble. Many consumer goods were in short supply; industrial wholesale prices had risen by an average of 29 or 30 per cent instead of the planned 19 per cent;…….

From the outset, the new economic model has had its opponents. There are orthodox Marxist-Leninists who fear that the new system would surrender too much of the socialist principle of central planning; there are party men who have secured a favorable position for themselves in the administrative apparatus and who are likely to lose much of their power if the new decentralization measures are fully implemented; there are factory directors who have held their positions because they were "politically reliable" and because they were good order takers and executors, hut who have little of the kind of entrepreneurial ability that will be demanded of managers in the future; there are workers who would rather keep what they have under a system of equalitarian wages than to see their income tied to their and to their enterprises’ economic performance; etc. And even if the majority of the Czechoslovak population looked hopefully forward to the new economic model, the apparent shortcomings of its implementation have left many disheartened. ……..

…Whatever the division among the Czechoslovak population, Czechoslovak economists seem agreed on the economic necessity of introducing the reforms and on the benefits to be derived from the utilization of the market mechanism. "The difference among Czechoslovak economists is merely one of degree," Dr. Oldrich Kyn of the Faculty of Political Economy of Charles University commented to me. "I personally do not believe in any Communism without a market," he went on. "The new economic model is Czechoslovakia’s only hope," Docent Josef Flek, who directs the Agricultural Section of the Czechoslovak Academy of Sciences’ Economic Institute, told me. "The economy will be led by the Plan," he explained further, "but the instrument of fulfillment will be the market." "Either you accept the market mechanism or you don’t," remarked Dr. Josef Goldman who heads the Academy’s Economic Institute’s Section for Research on Business Conditions and Economic Forecasting, "you can’t improve on it."

The stand of the economists in favor of a continuation of the new economic model appears to have the full backing of the Party…Alexander Dubcek emphasized that "the old management system will take us nowhere and we must in a concentrated manner introduce the economic management system ….

The Czechoslovak economy did progress under the new economic model in 1967: …

Yet, the shortcomings were so severe and so potentially dangerous that something had to be done without further delay. There seems to be a consensus of opinion among Czechoslovak economists and planners ….. that in the absence of well-developed competitive market conditions a temporary recentralization in many spheres is necessary. …

As to the long run function of central planning under the new economic model, Dr. Kyn explained it to me as follows:

We hope to combine the market with central planning, but central planning must be something different from Soviet command planning; it should be more like planning in France, perspective planning, aimed at giving each enterprise more information.

 

The role of the central plan should be 1. to provide a source of information, and, 2. to represent social preferences as to the aims of development.

 

Via its expenditures on social consumption, via expenditures for education, health, the army, etc., the center will in any case retain a substantial influence on the economy. All else can be left to the market.

But not all Czechoslovak economists assign quite as preeminent a role to the market. ….

While most Czechoslovak economists place the primary blame for the economic shortcomings of the last few months on an excessive increase in average wholesale prices with its corollaries of excess demand and inflationary pressures, others point to structural defects in production and pricing which leave some sectors and subsectors undersupplied, while others produce more than they can sell. Josef Goldman, for instance, pointed out to me that great shortages in high quality shoes coexisted with excess supplies of cheap textiles; and Oldrich Kyn explained that the freeing of all retail prices, as desirable as it would be in the future, was now impossible because the pricing structure was so distorted that it would cause great upheavals. ….

The re-emergence of administrative measures and the diminishing emphasis on decentralization—temporary though it may be—is apparent everywhere...

… A "second stage" of the centrally determined wholesale price revision is scheduled for partial introduction on January 1, 1968.27 The State Commission for Finance, Prices and Wages has prepared a plan whereby at least the upper limits of 81 per cent of all prices, and of 87 per cent of all consumer goods prices, will remain fixed by central bodies. …

…It seems a reasonable assumption that the present recentralization measures are but temporary, and necessary, emergency measures and do not amount to a retreat from the implementation of the new economic model. Even strongly anti-Communist sources are persuaded that "Party leaders are sincere in their desire to effectuate the reform." Moreover, there is surely great hope in the increasing realization that monopolistic tendencies must be overcome, that at least at this stage of development wage levelling is a deterrent to efficient performance, and that a market can perform its economic functions better the more individual prices, both wholesale and retail, are permitted to find their own level, according to the market forces of supply and demand.

Those who are engaged in the implementation of the new economic model appear quite willing to admit mistakes, to learn from them, to introduce changes where necessary, and to take a step backward in order to be able to take two steps forward in the future. The continuous earnest search for better methods, headed by first rate economists, holds great promise for a more efficient operation of the Czechoslovak economy.

"Freely fluctuating market prices have, unfortunately, not been introduced yet," remarked Dr. Kyn to me. "Let us hope," he went on, "that the price reform in 1968 will be the last step in dictating prices from above."

 

 

 

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