Reforms OLDRICH KYN: THE RISE AND FALL OF THE  ECONOMIC REFORM IN CZECHOSLOVAKIA

OLDRICH KYN: ECONOMIC REFORM IN CZECHOSLOVAKIA

 

 

III..The Reform

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Now we shall survey briefly the changes in the economic system which had been already implemented (or at least approved) before the policy changed to anti-reform.

1. Planning. At the beginning of 1967 the so-called "directive" character of planning was abolished. The targets (with some, but not very many, exceptions) given to enterprises were not orders, but rather suggestions what to produce. In 1968 and 1969 annual central plans did not exist. Instead of plans the government issued so-called "Economic Guidelines" containing parameters for economic policy and information about desirable output for whole branches of the economy. In preparation of its own annual plan each enterprise was to take into consideration the Economic Guidelines of the government but was not given any order as to how much to produce. The sum of the plans of enterprises was not necessarily equal to the targets given for the whole economy by central planners. In 1969 the enterprises planned in ways that deviated from the economic guidelines of the government as follows: (a) a lower rate of growth of output (4.6 percent by the sum of firm decisions compared with 6 percent in the central guidelines); (b) lower export to and higher import from the West (with an imbalance of 3 billion Kcs); (c) higher demand (500 million Kcs more than the guidelines) and lower supply (7 billion Kcs less) of investment goods; (d) higher employment (increase in 1969 to be 41 thousand while the actual increase in 1968 was only 4 thousand); (e) higher wages; etc.

2. Prices. The price reform which took place in January, 1967, increased the level of wholesale prices by 30 percent (compared with the expected 24 percent), and also redistributed a considerable part of national income from central funds to profits of enterprises (about 16 billion Kcs more than expected). The objective of price reform was to create conditions for: (a) introduction of a uniform capital charge and a uniform rate of taxation (which was achieved); (b) substantial reduction of subsidies (only partly achieved); (c) shift from centrally fixed to free and controlled prices (only partly achieved). The situation of prices was as follows:

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Categories of Prices  

(In percent of total sales)

At the End of 1968

Expected at the End of 1969*

Fixed

Controlled

Free

Fixed

Controlled

Free

wholesale

16

80

4

15

40

45

Retail: Total

77

0

23

45

16

39
Food

72

0

28

63

0

36
Industrial goods

82

0

18

25

33

42

* Official estimate.

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"Controlled prices" are those prices for which the firm must stay within the maximum increase allowed by the government for the aggregate price index of all products of given enterprise but may vary at will the prices of each individual good within the category. The idea, of course, was to allow flexibility while preventing inflation. This category has previously been misinterpreted in the West to mean simple maximum and minimum limits for individual prices.

3. Decentralization of Investments. Investments in industry were financed basically from retained profits and bank loans. Investment subsidies from the state budget were considerably cut. The total amount of investment (including investments in the "unproductive sphere") increased from 43 billion Kcs in 1965 to 70 billion Kcs in 1967, but investment subsidies from the state budget to so-called "economic organizations" fell from 19 billion Kcs in 1965 to approximately 10 billion Kcs in the years l967- 69. The investment credits and loans issued by the State bank amounted to 13 billion Kcs in 1965 and 25 billion in 1967, because of the shift from central to decentralized financing.

4. Taxation. Instead of the system of differentiated "deductions from profit" or "transfers" to the state budget, which depended on fulfillment of plan indicators, uniform taxation was introduced. Taxes consist of a 6 percent capital charge, 18 percent of "gross income," and the so-called "stabilization tax."

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5. Foreign Trade. The process of gradual liquidation of the "state monopoly of foreign trade" started. In some branches competing trading organizations were created and some big industrial firms were allowed to sell or buy abroad. Most prices of imported and exported goods were in the category of "free" prices. The system of differentiated surtaxes or subsidies to the export and import of individual products was to be abolished in five years (20 percent reduction each year). It was believed that this would improve the efficiency of foreign trade and eventually lead to convertibility of the crown.

6. Autonomy of Firms. At the beginning of the economic reform all enterprises were organized in about a hundred associations or trusts. The intention was to decentralize the controls from ministries to associations, but the ministerial system was in fact not abolished as was originally expected. Since they acted as pure monopolies in the market, creation of associations was in no sense good for promotion of competition, which was so badly needed for the functioning of the market mechanism.

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In 1968 it was already clear that some serious steps had to be taken to guarantee the real autonomy of the firms. First outlines of the "enterprise bill" containing the idea of "enterprise (workers) councils" began to be shaped. At the beginning of 1969 the bill was finally drafted and was expected to be approved before long by the National Assembly. According to the bill, enterprises would be governed both by professional managers and enterprise councils. The idea was to combine the skill of professional managers with the democratic principle of self-government. Managers would have the sole responsibility for current management (without any intervention by the councils) and for preparation of long-term projections for enterprise (requiring approval by the councils). Councils, as representatives of the owners, would elect directors for a four- to five-year period and would decide about distribution of net income.

The bill distinguished three different types of enterprises according to ownership:

  1. "Public enterprises" (about 90 percent of all enterprises), with councils elected by all employees of the enterprise, would be in collective ownership. Four-fifths of the council should be enterprise employees and one-fifth should be external members (possibly representatives of government, the state bank, experts, etc.).

  2. "State enterprises" (such as the state bank, state railways, etc.) would remain in state owner-ship. The larger part of their councils would be nominated by the government.

  3. Enterprises established by other enterprises or by state organs. These enterprises would be owned by their founders, who would nominate most members of their councils.

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During late 1968 councils were established in some enterprises. In January, 1969, there were councils already in more than 115 enterprises (most of them in industry), and creation of councils continued in the first half of 1969. It is worth mentioning that there are no more than 2,000 enterprises in the Czechoslovak economy in total, and only about 700 in industry.

Interesting information about 95 councils comes from an inquiry carried on in January, 1969. Some results of this inquiry were published by M. Barta in the journal, Politicka ekonomie, No.8 (1969). The first striking point is the composition of the councils. Even when they were elected in free democratic elections by all employees, 73 percent of the members were engineers, 22 percent workers, and only 5 percent administrative workers. Over 80 percent were employed in the enterprise for more than ten years, and most of them were highly skilled. The average level of education of the members of councils (29 percent with university education) was probably higher than the average level of education of the directors of these enterprises. M. Barta concludes:

"This finding suggests that enterprise councils are the true industrial elite . . . creation of councils can be considered as a protest of workers against the dilettantism of bureaucrats. . ."

Another interesting finding from the inquiry is that only 5.9 percent of the chairmen of councils answered that the main role of the council should be the maximization of income for the workers of the enterprise, while 31.6 percent thought that councils should mainly decide about the long-term development of the firm. The following table compares the views of directors and chairmen of councils.

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THE ROLE OF COUNCILS

 

According to the Views of

Chairmen of Councils

Directors

Decide Approve Consult Decide Approve Consult

Economic policy

51.1 38.0 10.9 23.2 62.2 14.6

Annual plans

  3.2 53.2 43.5   2.4 36.6 57.3

Rules for wages and bonuses 

   -- 36.6 62.3   1.2 27.5 62.5

Distribution of income

16.3 76.1   7.6 10.8 68.7 19.3

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