Economic Reforms in Communist COUNTRIES

...and it was pointed out that after the economy had been fundamentally restricted and made more complex, the advantages of the "warlike" methods would be increasingly dwarfed by their shortcomings...

...the same is true of the Czechoslovak, Hungarian, and Polish Five-Year Plans...

...To put the same thing somewhat differently, these changes attempt to bring about a shift in emphasis from administrative direct controls to pecuniary inducements as the guiding force behind the managerial activities...

...In view of some very sweeping pronouncements that have been made about the meaning of recent economic reforms in the Soviet Union and in Eastern Europe, it seems appropriate to begin by baldly stating my view as to what these reforms do not mean...

...and it was pointed out that the same target-setting procedures made it possible for individual managers to earn a bonus for successful execution of the plan by including in their outputs goods which were actually not wanted but which happened to be relatively easy to produce...

...Given the imperative need for rapid growth, the argument goes, a wide measure of centralized control and interference with the market was indispensable...

...6) The direct contractual supplier-customers relationships between enterprises in interlinked industries are to increase in scope...

...On principle, quite a few of the discharged workers could be quickly and usefully reabsorbed by a laborintensive and largely private small-scale manufacturing, construction, and trade...

...The reasons are manifold: (1)The steadily growing size and complexity of the economies causes the slapdash nature of decision-making to be more wasteful than before...

...2) Transition from the "extensive" to the "intensive" stage of economic development is in full swing...

...But chances of substantial expansion of such a sector are dim, for reasons which are, in major part, political and ideological...

...Some of the more nimble defenders of the old creed have been trying to steal a march on their adversaries in the prestigious area of the mushrooming mathematical economics by advocating extensive use of electronic computer techniques as a substitute for economic decentralization rather than as an important complement to it...

...Neither did they have a meaningful and operative price system that could inform men in charge at various levels of economic administration about comparative advantages of different product mixes and factor combinations that lie within the range of choices open to the economy...

...Indeed, it stands to reason that if sacrifices imposed on the people of the Soviet Union and of Eastern Europe during the initial period of Stalinist planning had been less harsh, and if the planned rate of growth as well as the investment targets had been more consistent with the actual size and structure of the productive capacity of the countries in question, a more balanced and an ultimately larger expansion of effective economic poten...

...A dramatic change in efficiency of resource utilization and in the quality of decision-making becomes imperative in order to prevent the rate of economic growth from slackening as it did in most of the Soviet-bloc countries during the sixties...

...It might be added that none of the leading Soviet and East European linear programmers and input-output analysts was taken in by this maneuver...

...They most definitely do not herald the restoration of capitalism in any form or shape...

...2) The far-reaching centralization of decision-making, in face of the stupendous multitude and complexity of the choices to be made, has caused the solutions to be slow in coming and not infrequently lacked in mutual consistency, not to speak of optimality (in the sense of extracting the greatest output of the desired composition from the given amount of productive resources...

...No doubt, the recently released Soviet Five-Year Plan is more moderate and less `voluntaristic" in its planned growth rate and investment targets than its Stalinist and Khrushchevian predecessors...

...c) Most importantly, we are not obliged to follow the Eastern and Western neo-Hegelians in accepting the actually adopted growth strategy as an inexorable must...

...Yet it seems highly dubious whether it is possible to manage from one center (even if fully equipped by modern electronics) a complex organism such as a modern national economy...

...The trouble with the recent reforms is not that they go too far from the standpoint of rational socialist policy, but that they do not go far enough, and that the pace of change is likely to be halting and uneven...

...Such impediments, it was stressed, were bound to arise at different levels of the administrative hierarchy...

...I have no great faith in a push-button economy...

...Nor is it surprising that Czechoslovakia— for which these considerations have acquired particular urgency and which experienced not merely a slowdown in her rate of growth but an actual drop in her national income in 1963—is at present in the forefront of the reform drive...

...In this connection, Oskar Lange's comparison with the "war economy" situation in the Western countries was often invoked...

...Such an administrator who does not want to part with his old habits would harm the cause of economic reconstruction...

...No doubt, the growth performance of the Soviet-type economies in the past has been remarkable by comparative standards, and development strategies suggested by various "deviators" from the Stalinist line would have had their share of tensions and risks...

...3) Some of the built-in incentives of the lower echelon men have been operating at cross purposes with the intentions of the central planners...

...All of them, nevertheless, are still quite ambitious, and they seem to operate on the implicit assumption that the recent reforms will bring about a quick and substantial improvement in over-all efficiency...

...But all of them share certain distinctive features: (1) Under the established system, the enterprise manager was confronted with a large array of planned indicators which were handed down to him from above and which determined the size and the composition of the output as well as the way of producing it...

...d) Assuming that the profit criterion will be rigorously enforced, it is quite possible that the workers whose contribution to the output is very low will be dismissed—a situation which would bring relief in the labor-shortage economy of Czechoslovakia, but which could generate some unemployment in all other countries...

...Large labor reserves due to open or "disguised" unemployment are either exhausted or significantly reduced...

...moreover, the final outcome of the new policy will decisively depend on the spirit in which it will be carried out by the powers-that-be, a point to which I shall return...

...rapid urbanization and improvement in skills set off the "revolution of rising expectations" whose demands can be ignored only at an increasingly high cost in terms of efficiency and socio-political stability...

...otherwise individual managers might, in response to faulty price signals, economize on factors which are relatively abundant, and show excessive lar gesse in use of the short-supply items...

...Inflationary pressures which were bound to develop could not but strain the efficacy of the price mechanism and generate specific shortages that could not be adequately dealt with by across-the-board measures of monetary and fiscal policy...

...It is likewise understandable that Rumania—with her vast manpower reserves still untapped, but above all with excellent prospects for further developments of her oil-based industries—can ride high by combining tight-fisted Stalinist methods of planning with an aggressive utilization of the good old "law of comparative advantage": she makes the most of the blessing conferred upon her by nature and unabashedly pushes the sales of oil and oil products in Western markets at the expense of much less remunerative trade with her Comecon associates...

...Lenin was very candid in admitting by 1921 that the economic centralization during the years of "war communism" had gone far beyond the call of duty...

...and it hardly needs emphasizing that the second crucial component, i.e., a consistently democratic political framework, has been conspicuously absent in the Soviet Union and in Eastern European "people's democracies," although the oppressiveness of the dictatorial one-party rule has undoubtedly abated during the post-Stalin era...

...and they will obviously have a much more than adequate power to intervene whenever a profit-and-loss calculation of an individual manager or of an industrial branch directorate should be seriously deficient in accounting for all positive or negative external effects of the productive activities of the respective enterprises and industries...

...M. The Prospects The over-all philosophy behind the reforms as seen by their leading intellectual protagonists was effectively summed up by Liberman: The system of centralized planning will be merely strengthened when we will free it of clogging detail...

...Yet while the reasoning is undoubtedly suggestive, it calls for strong qualifications: (a) Even in a "war economy" situation the tendency to concentrate the decision-making powers at the top can overreach itself and prove partly self-defeating: low priority and/or low-shortage areas should be allowed to shift for themselves, and some interdependencies are less stringent, and less crucial for the whole economy than others...

...In terms of our analogy, not all wars are alike, and men in charge do have in most cases at least some possibility to exercise options between more or less limited war objectives, more or less unrestrained methods of warfare, smaller or larger numbers of enemies to be fought at the same time...

...It is not known that ground rules for the price determination will be adopted (the average cost seems a more likely candidate than marginal cost, in spite of the justified preference of the leading theoretical economists of the area for the latter), nor how often the prices will be revised in response to changes in supply-and-demand conditions, and who will do the revising...

...4) An extensive price reform will be carried out in order to make relative prices correspond more closely to what is called in official parlance the relative amounts of the "socially necessary labor" expended in the production of goods...

...The specific devices used to achieve these objectives vary significantly from country to country, both in points of detail and in over-all degree of consistency and determination...

...Only then will centralized planning be able to concentrate on providing a scientific basis for the rate and proportions of economic growth, on matters of technological policy, on the system of prices, public finance, and on optimal relationships between consumption and accumulation...

...2) The standing of profitability among the planned indicators will be enhanced and the stimulus to raise it powerfully strengthened as the bonuses of the managers will be more closely linked to the level of profits earned and as enterprises will be allowed to retain and to reinvest a much higher share of their profits and depreciation allowances than exist now...

...It would surely be rash to expect that the reforms as such will significantly ease the "seller's market" situation prevailing in these economies, unless the planners will be reconciled to introduce an element of slack in the system by paring down their overall plans...

...To put the same point negatively, and to restate what has been said at the outset, I find it very difficult to take declarations about impending "restoration of capitalism" in the Soviet Union and Eastern Europe seriously, no matter whether such statements originate in the U.S...

...It is far from clear how the enterprise manager is supposed to act if the stipulations based on diverse indicators will turn out to be mutually inconsistent, and who is going to adjudicate the conflict...

...b) Disregard of, and interference with, the price mechanism can be pushed too far also within the context of the high-pressure-growth strategy...

...In such a situation, it is no longer sufficient to clamp down a very high rate of investment on the economy and to make it stick by hook or crook...

...Interview in Kornsomol'skaia Pravda, April 24, 1966...

...tial might have resulted...

...Rapid and drastic shifts in the composition of the output and in the level of technology called for deliberate synchronization and coordination of major investment decisions affecting large and interrelated areas of the economy...

...steel and coal are good examples...

...Some economists hope that miscalculation and mistakes under maximally centralized planning can be avoided by creating a vast network of computing centers, by combining them into one system and by subordinating them to a sort of operational electronic Gosplan...

...they also decisively, although indirectly, influenced the level of his own rewards...

...Should the fulfillment of these plans fall significantly short of expectations, tendencies toward recentralization will be strengthened...

...b) Greater latitude in spending retained parts of the enterprise's gross profits constitutes a clear gain in overall efficiency provided that managers are able to get what they actually want...

...The unwillingness to use the rate of interest or some workable substitute for it was likewise unfortunate: in view of the pressing need for quick and cumulative output increases, the Soviet-type economies would have been well served by a rationing device which could eliminate slowly maturing investment processes unless they promise strikingly high returns in the future, and forcibly remind the constructors that time is money...

...It might be worth noting, incidentally, that although Kosygin in his September, 1965, report envisaged an increase in the share of consumption in the national income, the draft of the Five-Year Plan adopted by the Twenty-third Congress of the CPSU six months later did not bear him out...

...Yet the dangers of excessive rigidity in the first group and of oligopolistic manipulation in the second cannot be discounted...

...5) There will be a stepping-up in the process of amalgamation of individual enterprises (most of them of a single-plant type) into broader organizational units ("firms" or "associations") which could relieve the central authorities of the tasks of intra-industrial co-ordination...

...Yet it should be kept in mind that these changes (as well as the less radical changes envisioned in other Soviet-bloc countries) are supposed to be carried out gradually through 1968...

...Now the number of these indicators will be sharply curtailed, and the most • This is a slightly expanded version of a paper presented at the second Socialist Scholars' Conference in New York on September 10, 1966, important of them—the gross value of output produced by the given enterprise—will be abandoned in favor of the total value of output actually sold or of some kind of index of the total net value accruing within the enterprise...

...they will be directly controlling monumental investment projects of country-wide importance...

...4) According to a view shared by many non-Communist economists in the West, the Stalinist methods during the early period were not merely less harmful than now but positively advantageous in an important sense...

...The Underlying Motives The typical weaknesses of the Stalinist planning system have been so often stated and restated during the last decade in the East as well as in the West that they can be summed up in a near-telegraphic style: (1) The Soviet and East European planners lacked proper criteria for rational allocation of scarce resources...

...Last, and most important: should the difficulties outlined in the preceding paragraphs materialize on a significant scale, the "centralizers" could be relied on to use them in order to turn the clock back as they did in Poland in the late fifties and in Czechoslovakia in the early sixties...

...While a delegation of authority in matters of detail to the lower echelons helped to avert chaos, it still left the superior agencies with backbreaking tasks of evaluation and reconciliation of competing claims from below...

...His Soviet and East European followers are gradually beginning to concede that much also with regard to the early industrialization plans in their countries...

...The enterprise may be objectively right, and the representative of the industry not...

...Chemicals and oil vs...

...central planning authorities will remain in charge of distributing the large bulk of investible resources over the major segments of the economy in conformity with the long-range development plans...

...1. The Reforms in Outline The proximate purpose of the changes in the system of economic administration which have recently been introduced in the Soviet Union and in most of Eastern Europe consists in enlarging the autonomy of the individual enterprises within the framework of centrally planned and predominantly collectivistic economies...

...But if the above-indicated considerations are plausible, impressive results could have been achieved at a smaller cost in human welfare and without generating, on anything like a comparable scale, whole clusters of institutional and behavioral patterns which were bound to become increasingly counterproductive and to develop a formidable staying power after the circumstances had changed...

...On the face of it, this holds true to a much attenuated extent, if at all, for the Czechoslovak reform which has only a few centrally fixed targets for directorates of industrial branch units rather than for individual enterprises, and which provides for compensating any economic losses caused to the enterprise by such fixed targets...

...Moreover, the international situation as it appears now is not conducive to the relaxation of pressures on the economy, to say the very least...

...Also, the much more sophisticated view, according to which the devolution of authority to individual enterprises will tend to reproduce some typical weaknesses of the atomistic market economy in a non-capitalist setting, seems unjustified.* Under the new system the * For reasons which should be readily understandable to the readers of DISSENT, I would not call the Soviet-type setting socialist...

...the same is true of underutilized high-quality natural resources...

...this, however, presupposes a much greater degree of flexibility on the supply side than the Soviet-type economies have known thus far...

...Yet the outlines of the impending price reforms are still, in most cases, fairly vague...

...hence their immediate impact is not likely to be significant...

...It is generally agreed that all these inefficiencies are more critical now than they were in the formative period of the economies in question...

...To put it in a nutshell, to Social Democrats like myself, a large measure of public ownership is a necessary but not a sufficient condition for considering a society socialist...

...Also, the perverse inclination to maximize rather than minimize the use of expensive raw materials as a result of output targets being formulated in terms of gross value or of weight has been widely commented upon...

...For example, the policy of keeping prices of producers' goods artificially low in the face of an escalating demand for them made little sense...

...3) The reduction of the technological lag makes it increasingly unrealistic to assume that a bold forward stride in adopting advanced foreign technology would more often than not represent a substantial improvement over the previous state of affairs even though the underlying investment decisions had been made in a "blunderbus" fashion and based on unreliable cost estimates...

...c) As was repeatedly pointed out, the enhanced standing of the profit criterion can improve efficiency only if the prices of goods and factors of production will be reflecting the underlying scarcities...

...The consequences of this situation were succinctly stated by Liberman in his already quoted interview: One can easily visualize the possibility that a ministry through some of its representatives will try to intervene administratively in matters in which it is not supposed to intervene...

...This is, if anything, still more true when the "war objective" is socio-economic modernization of a country...

...3) There will be a pronounced shift from outright grants to longterm repayable credits as the chief method of supplying investible resources to enterprises, and an interest-like charge on the use of fixed capital assets will be imposed (until now there was only a purely nominal charge on short-term bank credits...

...4) Last but not least, attention has been repeatedly drawn to impediments against steady and rapid diffusion of technological innovations, except when they seem truly striking and/or when an area of particularly high priority is involved...

...A clash could ensue...

...they reflected the central planners' desire to reduce the number of decisions they had to make, and the managers' fear of a temporary slowdown in operation in the wake of technological change-over, with underfulfillment of the output plans and a loss of the bonus as an inevitable concomitant...

...For a very clear recognition of the point, see Liberman's article in Pravda of November 21, 1965...

...But for the manager of the enterprise it will be hard to get embroiled every time in a conflict with the ministry he is subordinated to...

...On the last-mentioned point, the Czechoslovak reform is more explicit than all others...

...nor do they constitute a retreat toward the "mixed economy" of the Soviet NEP of the twenties or to a very similar system which was in existence throughout Eastern Europe during the late forties...

...It envisages three basic categories of prices: centrally fixed prices for 64 per cent of the industrial output, flexible prices with centrally determined upper limits (or in some cases upper and lower limits) for 29 per cent, and fully flexible prices for the remaining 7 per cent...

...or in China...

...This particular category of changes is most frequently associated with the name of the Soviet economist Evsei Liberman...

...3) The unusually frank discussion which preceded and followed the recent changes in the Soviet Union and in Eastern Europe has confirmed that influential elements within the existing political and administrative setup are still clinging to methods of the Stalinist command economy and are doing their level best to make the reforms a dead letter in a. variety of ways: There is evidence that Stalinist administrators in several East European countries managed to subvert the previous attempts to promote industrial associations and to transform these organizations into additional devices for the central planners' control over individual enterprises...

...The literature on the subject is replete with references to the "cat-and-mouse" game between managers and planning authorities, with the first lobbying for easy output targets and ample capital allocations, and the latter pushing for the opposite...

...2) The macro-economic setting within which the reforms operate is not too propitious...

...the gaps left by mistakes in planning are now harder to fill...

...Yet while the scope of these developments is much more limited than is frequently assumed, they are certainly important enough to merit our attention...

...I shall have more to say about it presently...

...In other words, the cycle of reform and counter-reform may well be resumed unless some major external or internal developments of a noneconomic nature should make this somewhat tame prediction look either unduly cautious or excessively optimistic...

...While the position of the enterprises with regard to the central authorities has been strengthened, the dice are still heavily loaded in favor of the latter: this holds true (for the duration of the transitional period, at least) also for Czechoslovakia...

...As the earlier paragraphs indicate, I am in general agreement with this attitude...

...her strong dependence on exports of highquality manufacturing goods to Western markets is an added stimulus for moving rapidly in this direction...

...On the other hand, whenever new technological frontiers do come within sight or when old substitution possibilities appear in a new light as a result of shifts in relative costs, it is, at least in one important respect, more difficult to make the switch than it was in the past because this entails not sacrificing "expendable" mass consumption and sucking in unemployed labor, but slowing down the development of powerful and well-entrenched high-priority industries...

...Here are, in all brevity, some of the reasons for apprehension: (1) The reforms as they stand now left a number of unresolved questions which can give rise to difficulties: (a) While the number of planned indicators is now reduced, there are still quite a few of them left around...