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Reforms

CZECHOSLOVAK  ECONOMIC REFORM OF 1960'S

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II. A Brief Survey of Postwar Development

 

downupImmediately after the Second World War a considerable portion of Czechoslovak industry was nationalized or transferred to the so-called national custody. The movement towards socialism and a planned economy was accepted as a social goal not only by the communists, but by most of the other political parties as well.3 The introduction of a purely Soviet-type economic system, however, was not considered before 1948. Instead, a mixed economy consisting of nationalized large-scale industry, along with medium- and small-scale private and cooperative firms, plus a combination of market and central planning was preferred.

The system was very clearly characterized by M. Bernasek: "Between May 1945 and February 1948 the Czechoslovak  economy developed into a model unique in the history of modern economic systems. The originality of the model was based on an attempt by an industrially developed country to combine three elements: the principles of a planned economy, the operation of a large nationalized industrial sector, and the system of political democracy. Although the model functioned barely three years and the economy was burdened by problems created by the Second World War, it strongly promised to develop into a full fledged system of democratic market socialism." 4

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The communist coup d’etat in February 1948 brought the independent development of the Czechoslovak economic system to an end. After the updemocratic political system was abandoned, the concepts of a mixed economy and the combination of market with planning were also discarded. Further nationalization and collectivization gradually eliminated the private sector. Central price control and, from 1953, centralized fixing of almost all prices together with the central allocation of raw materials, intermediate products and investment goods, were substituted for market forces. The bureaucratic methods of centralized command planning were copied from the Soviet Union.

Not long after the remodeling of the Czechoslovak economy according to the Soviet pattern was completed in the early 1950s, the first serious economic difficulties began to appear. The decline in the rate of growth5 and the appearance of imbalances were countered by partial reallocation of resources, and especially by further centralization of economic decision-making. Apparently this was too extreme. In spite of the quickly growing number of personnel in the economic ministries and planning offices, the planners soon realized that they were not able to cope with the complexities of managing a mature economy. Criticism of overcentralization became widespread and eventually led to the first attempt to decentralize the Czechoslovak economy.

The Czechoslovak economic reform of 19586 was not as far-reaching as that of the middle 1960s. It aimed at improvement, rather than outright change of the economic system. The firms were to get somewhat more freedom, particularly in investment policy. Introduced simultaneously were the so-called ‘long-term norms of material incentives’ designed so that enterprises would be less reluctant to reveal their production possibilities and thus would voluntarily accept high targets. Managers would also be more stimulated to fulfill production plans. 
At first the reform seemed to have a very positive impact on the economy. In 1960 and 1961, however, a visible slowdown of economic growth as well as serious imbalances began to appear. As could be expected, the decentralization movement was soon blamed for the growing economic difficulties and the reform was gradually phased out. The subsequent wave of re-centralization did not, however, prevent further deterioration. The economy ceased to grow and imbalances became so severe that the whole complex system of plans became useless for achieving coordination of economic processes.

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upThis unexpected experience led some of the Czechoslovak economists to the conclusion that decentralization was not wrong in itself, but rather that the reform had been inconsistent and not far- reaching enough. Attempts to improve the command system were said to be futile; what should have been done was to abolish administrative commands and restore the market mechanism. This idea was most clearly spelled out by B. Komenda and C. Kozusnik in an article which subsequently had great impact on the further development of economic thinking in Czechoslovakia. They wrote:.

Basic deficiencies of a [command] system were not resolved even by the changes of January 1, 1959. It is true that these changes contained an attempt to utilise economic instruments more extensively.... but this attempt was inconsistent. Administrative subdivision of targets remained a basic instrument of planning, and fulfillment of plans was retained as a basic criterion for the evaluation of enterprises.... The attempts to improve the quality and scientific level of planned management therefore should be interpreted not only as partial improvements of the existing system or improvements of indicators . . . but as a basic reevaluation of the fundamental principles and primary methods and instruments of planning.... The kernel of the problem lies in commodity production - particularly, in the function of value categories, and especially in the function of market mechanism.... True scientific planning . . . must utilize a market mechanism7

 

 

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upThus the idea of abolishing the command system and restoring the market mechanism was born. Because of the traditional aversion of orthodox Marxists to the market mechanism many of the academic economists, planners, and especially politicians initially refused to accept it. Nevertheless, discontent with the old economic system was so widespread that prejudices against the market very quickly gave way to the new ideology of market socialism.
The blueprint for economic reform was worked out during 1964 and was approved by the Central Committee of the Communist Party in January 1965. It was published under the title Main Directions for the Improvement of Planned Management of the National Economy. 8 This document was relatively radical because it called for (i) virtual elimination of obligatory targets, (ii) flexible competitive pricing and (iii) considerable decentralization of investment decisions. On the other hand, as a result of a compromise between the progressive and conservative forces, it remained in many respects inconsistent. For example, it still insisted on the dominant role of the central plan, and maintained several specific obligatory production quotas. It also retained large categories of centrally fixed and limited prices along with the category of ‘free prices’, and its proposal for reform in the spheres of foreign trade, finance and banking were very unsatisfactory. Worst of all, it provided for further administrative concentration of the economy into about 100 gigantic associations. In addition, the final shape of the system was to be realized only after a prolonged transition period, so that only small changes were to be introduced during the initial years of the reform.

 

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upThe first 9 actual steps towards implementing the reform proposals were made in 1966 but they were very timid. The targets prescribed by the central plan were supposed to be only for ‘orientation’ but de facto they remained obligatory. In the crucial sphere of pricing only about ten per cent of prices were set free. 
Almost two years of public discussion about the reform passed and nothing really substantial was accomplished. The reformers, who in the meantime were receiving greater and greater support from various strata of society, particularly from economists, planners and managers, responded by elaborating a new version of the blueprint for reform. This new version, known as The Principles of Accelerated Implementation of the New System of Management, 10 was more consistent and more radical than the original Main Directions. It made it explicit that a well functioning market is a necessary precondition for the new economic system and that free competitive pricing must be introduced to the maximum extent as soon as possible. It stated that the role of the central plan is to guide the economy in the macroeconomic sense and that it should be implemented primarily through the indirect tools of government policy and not by imposing obligatory quotas on individual enterprises. Enterprises must have true autonomy, especially in investment decisions, and foreign markets must be accessible to all of them. A uniform rate of taxation on enterprise income must replace the system of redistributing this income through the differentiated deductions and subsidies. 
The main innovation of the Principles of the Accelerated Implementation was the insistence on the necessity of simultaneously implementing the main bulk of the reform measures immediately after the general revision of wholesale prices, which was carried through in January 1967.

 

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upUnfortunately, the price revision was not very successful, and due to the uncertainties created by the unexpected price changes, the political leaders of the country hesitated to take any further radical steps. Uniform taxation was introduced, but the category of ‘free prices’ was reduced, rather than extended, and the central authorities were very reluctant to continue the process of decentralizing economic decision making. Once more implementation lagged far behind the blueprint proposals. At that point it became quite obvious that it was not the obsolete price system but rather the obsolete political system which was the main obstacle to the development of market socialism. The core of economic reformers had been well aware of this fact long before 1967. Fortunately, discontent with the totalitarian political system was already widespread among the population and even among those who themselves were part of the state and party hierarchy. It was only after the radical political changes which transpired in the spring of 1968 that the way to a truly consistent application of the principles of the economic reform was opened. 
In the new liberal political milieu almost all the ideological obstacles to the free discussion of controversial economic issues were removed. This in turn contributed to the further enhancement of the blueprint for the new economic system. Some new features were incorporated into the Action Program of the Communist Party in April 1968, and others appeared later in the year. The following three are perhaps the most important among them: (i) separation of economic management from the state and especially from the party apparatus; (ii) organizational freedom: each enterprise should have a right to leave or join any association, and new enterprises may be independently created; (iii) Workers’ Councils: appointment of directors and the basic entrepreneurial functions should be vested in councils democratically elected by the employees of each enterprise.

 

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upThe Soviet invasion in August of 1968 unquestionably marked the end of the Czechoslovak attempt to transform the totalitarian political structure into a democratic political system. On the other hand, it was not immediately clear whether it also necessarily meant the end of economic reform. There were some indications that the main cause of the invasion had been dissatisfaction with political developments rather than opposition to the economic reforms.
For several months after the invasion, the economic reformers and the progressive politicians who had not yet been dismissed made a concerted effort to continue the economic reform, or at least to salvage as much as possible. It was not until the summer of 1969 that any significant retreat from the principles of market socialism and even at that time the proponents of the ‘reorientation’ of the reform spoke as avowed partisans of the market. For example, Jaroslav Jirasek wrote in the economic weekly Hospodarske noviny, in 1969:

. . . The centralist administrative model is so discredited that to choose this model would cause a reversal in the course of history. ... There is no choice other than an economy with a market character. . . 11

From that time, however, the retrogression began to gain momentum. Not only were many reform measures abolished--including the dissolution of the workers' councils--but the theory of market socialism began to be denounced as revisionist and antisocialist. This official line was clearly expressed by the Minister of Planning and Deputy Prime Minister, Vaclav Hula, in May 1970:

It is known that from the beginning, revisionist and opportunist elements, especially from the theoretical front, penetrated the implementation of economic reform.... In 1968 they were allowed to question the political basis of socialism.... The economic basis was also attacked . . . 12 Under no condition do we want a return to the old obsolete system of management. However, we cannot allow--and certainly we shall not allow--that the basic principles of management of a socialist economy be forgotten.13

 

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Theseup 'basic principles' included the binding character of the central plan, centralization of economic decision-making, the 'leading role' of the Communist Party in the economy, central price fixing, etc. According to Hula, the new orientation in economic reform was 'central management by governmental organs on the basis of a binding plan, in combination with commodity-money relations.' In spite of all the claims about the temporary character of these economic measures, such as the total price freeze, and in spite of the nominal assurances about the continuation of economic reforms, it was quite obvious by 1970 that the 'official line' was to abandon market socialism and return to the Soviet-type command economy. In 1971, this regression was made explicit in a series of party documents, and was legalized by governmental decrees. The main document of this kind was approved- by the Czechoslovak government in June 197114. The circle was finally closed: the Czechoslovak economic system has returned to the point where it had started some seven years before. The Communist Party could then 'proudly' announce that economic reform had been rescinded and that no other changes were being considered. 'At present we have a system of management from which the gross deformities of the years 1967--9 have been removed; it is a system well suited for planning, management and work. Certainly, it can still be improved, but larger and more important changes will be undertaken only after profound consideration and thorough testing.’ 15

 

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