III. Main Features of the Economic Reform
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.
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.
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 'Principles' also indicated that it may not be desirable to disaggregate the central plan into specific targets and quotas.
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.
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.
(ii) It is desirable to separate technical and political components of planning decisions.
(iii) Optimality of the plan is a precondition for the combination of planning with market.
(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:
And actually, the government and the party responded by attempting to 'raise the authority' of the central plan, but were still hesitant t 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:
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.