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KYN - SLAMA - SCHRETTL: Growth Cycles 

 

 3.Testing Reinvestment Cycles Hypothesis 

 
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With regard to the propagation mechanism, most of the theories of growth cycles in centrally planned economies can be classified in two, not necessarily disjoint, groups:

  • The theories of investment cycles in which investment - especially the technical aspects of it play a crucial role in the cyclical movements.

  • The theories of planning cycles which put the emphasis onto the behavior of planners.

The theories of investment cycles have two major variants: one puts the blame for the cycle mostly on reinvestment (Lange, Notkin) and the other on the investment lag or the gestation period, that is on the lag between investment decisions or investment expenditures and the completion of investment projects (Kalecki, Goldmann, Kouba, Klacek, Kupka).

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The reinvestment cycles were most rigorously formulated by Oskar Lange in his Theory of Reproduction and Accumulation, where he demonstrates mathematically, that a sudden increase of investment activities and a concentration of large scale investment on short time periods such as in the Soviet Union and other East European countries during their industrialization programs should create an "echo effect" in reinvestment and thus cause economic fluctuations. Reinvestment also plays an important role in the business fluctuations of market economies, however in a very different manner: The need for large-scale reinvestment suddenly increases the aggregate demand and through the multiplier effect stimulates the recovery or further expansion of the economy. The reinvestment cycle in the centrally planned economy is supposed to work in an opposite direction. The cumulated necessity to scrap large chunks of worn-out capital stock could cause a sudden decline or at least a marked slow-down of the growth of capacity and, consequently, also of output.

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This itself would lead to wave-like behavior of the rates of growth so typical for the growth cycles. Lange shows also that the nonuniform life time of capital goods would work towards relatively quick spread of reinvestment over an ever longer time period and would thus dampen the cycle. Lange also recognizes the fact that the life time of capital goods is not firmly fixed and that the planners can smooth the cycle considerably by a deliberate delay in scrapping of some portion of obsolete capital.

We do not want to reject totally the role of reinvestment in economic fluctuations it is obviously true that scrapping cannot be postponed indefinitely. However, we think that the empirical facts do not show reinvestment to be the major factor causing economic fluctuations.

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Table 1: 

Capital Stock Scrappage and Newly Constructed Capital

Year Capital Stock Scrappage Newly Constructed Capital
Buildings and Constructions Machines and Equipment Buildings and Constructions Machines and Equipment
Millions of 1967 Kcs. o/oo of Capital Stock (Dec.31) Millions of 1967 Kcs. o/oo of Capital Stock (Dec.31) Millions of 1967 Kcs. o/oo of Capital Stock (Dec.31) Millions of 1967 Kcs. o/oo of Capital Stock (Dec.31)
1948 759 1.25 1360 14.28 9851 16.23 4689 49.25
1949 759 1.23 1380 14.01 9833 15.97 4670 47.41
1950 782 1.25 1498 14.74 9874 15.80 4646 45.70
1951 871 1.36 1640 15.20 17613 27.45 7869 72.94
1952 881 1.34 1676 14.69 17902 27.18 7848 68.81
1953 906 1.34 1730 14.30 18626 27.53 8666 71.63
1954 978 1.41 1851 14.49 19157 27.58 8617 67.45
1955 962 1.35 1605 11.91 19364 27.16 8564 63.57
1956 1381 1.89 1962 13.59 19861 27.15 11641 80.62
1957 1363 1.81 2607 16.91 21166 28.17 12392 80.37
1958 1771 2.29 2862 17.26 23435 30.32 14493 87.41
1959 2322 2.91 3628 20.21 28407 35.55 17344 96.61
1960 2122 2.57 5027 25.91 30214 36.53 19486 100.45
1961 2578 3.01 4448 21.19 31348 36.62 20342 96.92
1962 2994 3.38 4675 20.80 33101 37.36 19580 87.11
1963 3335 3.65 5151 21.57 32046 35.03 19150 80.20
1964 3478 3.68 6196 24.16 33849 35.81 23877 93.10
1965 6880 7.08 10035 37.19 33819 34.79 23433 86.83
1966 12210 12.26 11452 40.58 36403 36.54 23771 84.24
1967 8076 7.84 8584 28.95 41841 40.62 22864 77.12
1968 7661 7.22 7150 22.82 38974 36.72 24006 76.62
1969 8938 8.17 6930 18.48 53755 47.12 32895 91.74
1971 6729 5.70 7406 19.25 54405 45.78 33650 74.42
1972 8382 6.77 8027 16.65 69027 53.04 38508 87.10

Sources: FSCJ (n.d.), Table 01; FSU (1975),  p.216;  own computations. FSCJ (n.d.), Table 01; FSU (1975),  p.216;  own computations.

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The data on scrappage of capital stock (Table 1) show that up to 1955 scrappage was kept on an unusually low level - around 0.3 percent of capital stock; in the following ten years (1955-64), the trend was reversed and the scrappage ratio was steadily growing to reach 0.84 percent in 1964 (see Fink and Slama). In relative terms, this was a large increase; in absolute terms, however, it was still so small that it could not visibly slow down the growth of productive capacities. For example, in 1960 total scrappage was roughly by 2.5 billion Kcs larger than in 1958, but in each of these two years almost 50 billion Kcs of new capacities were built. Then a really large dent came in 1965 and 1966. The total scrappage was increased from 9.7 billion Kcs in 1964 to 16.9 billion Kcs in 1965 and 23.7 billion Kcs in 1966, but subsequently declined to 16.7 billion Kcs in 1967. This can really look like the classical echo-effect with about 15 years lag after the large investment expansion during the First Five-Year Plan.

It is interesting to note that the mean age of machines and equipment scrapped around this time was almost exactly 15 years. We do not have data for the years1965-1966, but it could not have been very different from the mean age of scrapped capital in 1971, for which the information is available (see Table 2).

7   updownTable 2

The Vintage Distribution of Scrappage of Capital Stock

in 1971 in CSSR (Socialist Sector)

 

Age Groups

Buildings and Constructions Scrapped

Machines and Equipment Scrapped

Millions of 1967 Kcs

%

Millions of 1967 Kcs

%

0 - 5

832

12.8

982

14.3

6 - 10

775

11.9

1679

24.5

11 - 15

771

11.9

1627

23.8

16 - 25

1031

15.8

1197

17.5

26 - 50

1458

22.5

1057

15.4

over_50

1636

25.1

309

4.5

Total

6503

100.0

6851

100.0

Mean Age

29.9

15.9

Source: Computed from FSU (1963), Tables 8 - 25

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In spite of these apparent facts, we think that the reinvestment hypothesis cannot explain the growth cycles in Czechoslovakia. The large-scale scrappage in the years 1965-1966 was not really an echo effect, but rather a deliberate change in economic policy. In those years, Czechoslovakia underwent radical theoretical and ideological reorientation, in which economists and planners became highly efficiency-conscious and were calling for a redirection of the economy from extensive to intensive growth.

The predominance of policy over technical reasons for large scale scrappage in 1965~1 966 can be documented by two facts: a) although the average age of scrapped buildings and constructions was about 30 years, their scrappage increased in the same years as the scrappage of machines. b) The vintage distribution of scrapped capital is so wide (see Table 2) that the sudden increase of total scrappage cannot be explained by one vintage only.

In any case, and this is most important, the large scale scrappage in 1965-66 could not have caused the down-swing, because it came just at its end, at a time when the economy was already recovering from stagnation.

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