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THE "INVERTED ECONOMIC MIRACLE": Recession in Czechoslovakia, 1962-63

by Colleen Feehan

 

During the period of 1962-63, Czechoslovakia experienced "one of the severest economic recessions in any country since the end of WWII-- a case of the `inverted economic miracle' that profoundly shook the entire superstructure (Feiwel, 60)." While the economy grew impressively in the late 1950s and 1960, deceleration occurred in `61, greater decline in `62, and a negative growth rate of 3% in `63 (Feiwel 75-77). The predominant factor of decline in the growth rate was the planning system. The secondary factor of decline in the growth rate was the economic structure and its tendency toward over-investment (Feiwel 75-77). Though the growth rate revived itself in 1964, an analysis of the causes and effects of such a recession is essential to understanding fluctuations of growth in the Czechoslovak economy under the Soviet-type system.

In exploring the three key "escape channels (leakages) in the planning system deemed to be of sufficient quantitative importance (Feiwel 75)", one can identify these escape channels as the immediate causes of deceleration. The first cause was the superfluous rise of inventories which is considered to be the "cycle-accelerating (reducing) factor." The rate of growth of inventories accelerates the rate at which the turning point is reached in both the expansion and the contraction phases of the cycle. The inventory cycle is synchronized with and further prolongs, the commissioning of new capacities.

 

The inventory cycles are characterized by `speculative' accumulation of materials at the peak of the cycle and by a relative or absolute drop of inventory accumulation at the trough of the cycle (Feiwel 72-73). Feiwel gives two reasons for this:

"1) Growth is accelerated by increases in output originating from new capacities whose construction started near the peak of the preceding investment wave. The flow of supply increases, while simultaneously, as a result of a relatively moderate rate of growth and of reduced investment, demand declines mainly in the basic branches of industry.

2) The peak of investment activity magnifies pressures in the economy, aggravates the imbalances, causes greater hoarding of inventories, and necessitates a slowdown in the rate of growth in the immediately following period (Feiwel 72-73)."

 

In addition to the long-run theory of slowdown mentioned above, Goldmann and Kouba have examined the joint impact of of synchronized investment and inventory cycles on economic equilibrium and the resulting growth rate. In 1961, two-thirds of the incremental change in income from 1960 was used to increase accumulation, and one-third was used to increase consumption. The expansion of accumulation into inventories and capital-under-construction was greater than the increase in consumption or in fixed capital accumulation, net of capital-under-construction. In 1961, factors of production tied up in production increased greatly, relative to factor inputs. Therefore, the final products for consumption or fixed capital formation was relatively low in comparison to the input of factors of production. On the other hand, in 1964, however, the amount of accumulation into inventories and capital-under-construction greatly decreased. Consequently, inventories and capital-under-construction declined. As a result, the output of final products was much larger than expected from the input of factors of production." Thus, the accumulation of inventories and of capital-under-construction make for fluctuations of economic ten- sion, imbalance, and growth (Goldmann-Kouba 50-52).

 

The second cause of deceleration was the superfluous increase of unfinished construction. "A sizable share of accumulation was tied up in unfinished construction and inventories which in 1961 amounted to over one fifth of national income and was about equal in size to the annual volume of investment for that year (Feiwel 75-77)." As construction projects were frozen, output, productivity (per unit of labor and per unit of machinery), and employment diminished in the construction industry. The first projects frozen were the `decentralized' projects, where building work was already declining by the end of 1961. The major centrally approved projects were cut by late `62, reaching a low point at the beginning 1963 (77% of the 1962 level) (Myant 97).

The third cause of deceleration was the gradual deterioration of the input-output ratios (particularly excessive use of materials). Rozsypal, the architect of the 1958 reform, blames the "`unreality of the extent and structure of investment in the Third Five Year Plan' as part of `the rapid building of the material base for a future communist society' (Myant 97)." While this can be considered an escape channel in the planning system, it is also noted as a structural factor. Professor Michal Kalecki explains that in a relatively small, industrially developed socialist country, a gap exists between the quantity of raw materials domestically available to the country and the growth of manufacturing industries whenever the rate of growth exceeds a certain optimum level (Goldmann-Kouba, 43). In Czechoslovakia, the total industrial output in 1963 was four times the level of output in 1938 (Feiwel).

 

Meanwhile, manufacturing of heavy industry had virtually exhausted their supply of raw materials. Kalecki further explains that this type of phenomenon creates a raw-material barrier through under-fulfillment of production and investment plans in the raw materials sector and over-fulfillment of such plans in the heavy industry sector (Goldmann- Kouba, 43).

The raw-material barrier causes additional imbalances in the foreign trade balance (Goldmann- Kouba, 43). Czechoslovakia became increasingly dependent on deliveries of raw materials from the Soviets, who were often-times unwilling to supply, and were experiencing severe agricultural crisis in the early `60s. Forced to import raw materials from the West, Czechoslovkia's balance of payments was further upset by a variety of exchange rates, and the West's unwillingness to accept substandard products. They felt the pain of losing touch with a demanding world market as a result of the greater increase in the growth of imports than in the growth of national income in the `60s.

 

Furthermore, due to the poor quality of the Czechoslovak exports of machinery, they experienced a decline in export prices earned and an increase in import prices paid (Feiwel). Kalecki concludes that the raw-material barrier is bound to slow down economic growth in such a country (Goldmann-Kouba), and clearly did in Czechoslovakia in the early `60s.

Adding to the effects of the raw-material trade barrier on the foreign trade balance, external factors like the cut off of trade with China in the early 60's badly hurt Czechoslovakia economically. "The loss of China as an export market for Czechoslovak machinery and as a source of raw materials considerably affected the economy (Feiwel 48)." Left with a stock of highly specialized equipment, which was of no use to anyone else, the economy suffered from the cost of breaking the machinery down. Furthermore, growing aid to underdeveloped countries strained the balance of payments (Feiwel 48).

Among other factors of deceleration, the disincentives built into the planning system caused a huge lack of interest in technical progress, further stunting economic growth. The recorded increase in labor productivity was primarily accompanied by rising investments, rather than by technical progress (Feiwel 77). The inefficiencies and incapability of the command economy to generate a steady flow of innovations and technical change contributed to the overall long-term slowdown of growth that caused the recession (Kyn's comments).

 

While the economic structure is interwoven in many ways with the planning system, it is debateable whether it was a secondary factor of deceleration in Czechoslovakia during the period of 1961-63. The inefficiencies of the traditional planning system would have existed regardless of whether or not over-investment was occurring. Structural changes at a time like this were made at the expense of the standard of living. However, if the causes of escape channels and waste rooted in the planning system were eliminated first, the remaining resources could have been used for structural changes. This was highly unlikely given the traditional planning system (Feiwel 78).

Thus, the causes of deceleration can be summarized as follows: "the accumulation of inventories reaches its peak when the growth rate has already begun to decline; the accumulation of stocks acts as a catalyst in the deceleration of growth rates. Deceleration sets in when the effects of foreign trade, materials, and capacity barriers make themselves strongly felt (Feiwel 73)." "Had wasteful investments and the retarding effects of the obsolete planning system not occurred in the years 1962-65, the growth might have been about 36 percent. The recorded growth for the period was only about 4 percent (Feiwel 70-71)."

The major effect of the recession in Czechoslovakia was that it made planners face the fact the goal of economic planning is not to achieve the highest growth rate possible, but a balanced one. Planners were forced by the recession to "shift growth into a lower gear". Furthermore, planners were forced to "reduce the commitment of resources to investment (Feiwel 78)." In 1964, a new period of accelerated growth began (Goldmann-Kouba 41).

 

Sources:

  • 1) Feiwel, George R. New Economic Patterns in Czechoslovakia. Frederick A. Preager Publish- ers, New York; 1968.

  • 2) Goldmann, Josef and Kouba, Karel. Economic Growth in Czechoslovakia.Academia, Pra-gue; 1969.

  • 3) Myant, Martin. The Czechoslovak Economy 1948-88. Cambridge University Press, Cam- bridge; 1989.

  • 4) Kyn's comments on first draft.

 

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