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Czechoslovakia ECONOMIC POLICY AND PERFORMANCE
The Czechoslovak economy emerged from World War II relatively
undamaged. Industry, which was the largest sector of the economy,
included large firms in light and heavy industry. During the war,
the German occupation authorities had taken over all major
industrial plants. After the war, the reconstituted Czechoslovak
government took control of these plants. Foreign trade was still
in private hands, however, and remained important in the economy.
Exports of machinery and consumer goods paid for imports of
materials for processing. The quality of Czechoslovak export
products was comparable to that of products produced in other
industrialized countries. Agriculture also remained in private
hands, and farming was still largely a family affair. The labor
force as a whole was skilled and productive, and management was
competent. This mixed system, containing elements of socialism
and private enterprise, operated efficiently in 1947 and 1948
under a two-year plan in which goals were general and indicative
rather than mandatory. The country received considerable
assistance from the West through the United Nations, and most of
its trade was with the West. Until prohibited by Stalin in 1947,
Czechoslovakia intended to participate in the United States
Marshall Plan to rebuild Europe. By 1948 Czechoslovak production
approximated prewar levels, agricultural output being somewhat
lower and industrial output somewhat higher than earlier levels.
When the KSC assumed complete political and economic control in
February 1948, it began immediately to transform the Czechoslovak
economy into a miniature version of that of the Soviet Union
(see Stalinization
, ch. 1). By 1952 the government had nationalized
nearly all sectors; many experienced managers had been replaced
by politically reliable individuals, some of them with few
technical qualifications. Central planning provided a mandatory
guide for institutions and managers to follow in nearly all
economic activity.
The targets of the First Five-Year Plan (1949-53) reflected
the government's commitment to expansion of the producer goods
sector of the economy. The goals were dramatically revised
upwards after 1949, partly in response to the Korean War, to
build up metallurgy and heavy industry. The country became an
important supplier of machinery and arms to other communist
countries. Foreign trade with noncommunist countries dropped
sharply (in part because of trade controls imposed in those
countries); trade with communist countries increased from 40
percent of the country's total in 1948 to 70 percent a decade
later. The economy failed to reach the ambitious goals of the
first plan, although investment and growth were high. By the end
of the plan period, serious inflationary pressures and other
imbalances had developed, requiring a currency conversion in 1953
that wiped out many people's savings and provoked outbreaks of
civil disorder.
The years 1954 and 1955 were covered by yearly plans only;
the scheduling change was part of an effort by the members of the
Council for Mutual Economic Assistance (Comecon) to correlate and
integrate their planning by using common planning periods
(see Appendix B).
The Second Five-Year Plan then encompassed the years
1956-60. During that period, investment continued at a high rate,
although real wages and the supply of consumer goods also
increased substantially, and national income grew by 6.9 percent.
In the late 1950s, however, economic leaders noted that
investment efforts were yielding diminishing returns. Large
investments were required to sustain economic growth. In 1958 and
1959, in response to this troubling situation, the government
made several relatively minor adjustments in the functioning of
organizations and prices--the first of the country's economic
reforms. The reforms involved some limited decentralization of
authority, most notably giving enterprises more autonomy in
handling investment funds. The intention was not to alter the
Soviet economic model to any great extent but rather to enhance
its overall operation. The reforms did not result in noticeable
improvements in economic performance, however. Eventually, in
1962, planners quietly scrapped the entire reform program,
reimposing most of the central controls.
During the early 1960s, industrial production stagnated. The
agricultural sector also registered a relatively poor
performance. Agriculture had been a weak part of the economy
throughout the 1950s, consistently failing to reach planned
output targets, and the minimal reforms of 1958-59 had done
little to alter the situation. Targets set for the national
economy in the Third Five-Year Plan (1961-65) quickly proved to
be overly ambitious, particularly with regard to foreign trade.
The plan was dropped after a recession in 1962, and annual plans
covered the remainder of the period. National income actually
declined in 1963. By 1965 it was only 1.9 percent higher than in
1960, in comparison with a 6.9 percent growth rate in the 1956-60
period. Many factors contributed to the economy's poor
performance, including adverse weather for agriculture,
cancellation of orders by China resulting from the Sino-Soviet
dispute, and unrealistic plan goals. By this time, however,
reform-minded economists had reached the conclusion that much of
the blame lay in deficiencies of the Soviet model. They began to
prepare additional reform measures to improve the economy's
efficiency.
Serious defects in the Soviet model for economic development
had long been recognized by some Czechoslovak economists, and
calls for decentralization had occurred as early as 1954.
Economists and others had argued that it was inappropriate to
apply the Soviet model to Czechoslovakia in a dogmatic manner.
The country was already industrialized, had few natural resources
and a small internal market, and remained dependent on foreign
trade in significant ways. The model emphasized extensive
development, such as building new factories, rather than
intensive investment in which production processes were
modernized and efficiency improved. The pressure for greater
investment and defense production during the 1950s had caused
private consumption to grow more slowly than net material
product. The result had been a chronic inflationary bias,
reflected in shortages of consumer goods and forced savings by
the population. Plants and construction firms held large
inventories of materials to compensate for irregular deliveries
from suppliers. Completion of most investment projects required
an inordinate amount of time, freezing funds in unproductive
uses. Inadequate investment in agriculture had contributed to the
latter's chronically poor performance. Prices were also a
problem, based as they were on often conflicting policies; prices
reflected neither scarcity nor cost, bore little rational
relationship to one another in the domestic market, and had
become increasingly divorced from world prices. The system
appeared to stifle innovation and to offer no basis for selecting
between investment and production alternatives or for judging
efficiency.
By the early 1960s, several Czechoslovak economists had
analyzed these problems and had remedies to offer. One spokesman
for the reformers was the economist Ota Sik, a member of the KSC
Central Committee and its Economic Commission
(see National Organization
, ch. 4). Party and government officials listened
because after the 1962 recession and the earlier failure of the
1958 reforms they recognized that something had to be done. In
October 1964, the party published a set of principles for major
economic reform and, beginning in 1965, started implementing
specific measures. In June 1966, the Thirteenth Party Congress
gave its official approval to the new program, which came to be
called the New Economic Model (NEM). Some influential party
leaders remained opposed to the reforms, apparently concerned
about possible domestic political repercussions. These party
leaders engaged in what they termed "correction of deficiencies,"
but in the process they diluted the content of the reform
measures. Only after the party leadership changed in January 1968
did support for the reforms increase and the pace of reform
quicken
(see The Reform Movement
, ch. 1).
The reform program was multifaceted, and portions of it were
never implemented. Its principal object was to limit
significantly the role of the central planning authorities while
expanding the autonomy and responsibility of the enterprises. The
central planning authorities were to concern themselves only with
overall long-term planning of economic development and to provide
general guidance through the formulation of a limited number of
economic goals. Enterprises and their associations would be free
to determine short-term production targets within the framework
of the overall goals. Individual enterprises were to become
financially viable, realizing a profit from their sales after
covering all costs and various state levies. State subsidies
would gradually end; enterprises that could not operate at a
profit would have to close. Profit, rather than fulfillment of
planned quantitative output targets, was to become the main
criterion for evaluating the economic performance of enterprises.
This change in emphasis, it was hoped, would make enterprises
more competitive and more responsive to the demands of customers.
At the same time, producers were to be increasingly exposed to
foreign competition, so that they would seek to increase their
own productivity and lower prices. As a means of earning much-
needed hard currencies, exports to Western countries were to be
stimulated through incentives encouraging enterprises to make
their products competitive on world markets; the incentives would
include the right to retain a portion of the foreign currency
profit.
In the reform program, a more realistic system of prices was
to replace the centrally determined system. Prices were to
reflect actual costs, the supply and demand situation, and
relevant world prices. Enterprises were to finance investments
with their own resources and interest-bearing bank loans and
would have to justify their investments in terms of need,
effectiveness, and cost so that widespread waste of investment
resources would cease. The state would provide investment funds
only for key economic development projects. Finally, a revised
wage and salary system was to eliminate egalitarianism in the
wage structure and substitute a system based on individual work
performance and on results obtained by the employing enterprise.
To ensure greater concentration and specialization of
industrial production, the government consolidated enterprises
into large production units resembling trusts or cartels managed
by "branch directorates." These large production units formed an
intermediate link between the enterprises and the ministries. The
branch directorates had overall responsibility for the
performance of enterprises under their jurisdiction, but the
division of authority between the larger unit or trust and its
subordinate members was not clearly defined.
In the spring of 1968, the government permitted enterprises
to experiment with worker participation in management through the
establishment of enterprise councils. Direct involvement of
workers in the management of enterprises was expected to bring
about an improvement in morale and performance by calling into
play the workers' self-interest. The form of the councils was
left vague because it was thought that the varying sizes of
enterprises would necessitate different forms.
In sponsoring their program, Czechoslovak reformers did not
intend to introduce free enterprise or to permit free play of
market forces. They were committed socialists trying to improve
economic management under continuing party control, but with
fewer rigid controls than had formerly existed. They had
implemented only a portion of their program by August 1968, when
Soviet and other Warsaw Pact troops invaded the country and the
reform experiment came to an end. The reforms and other elements
of the Prague Spring had become too threatening to party control,
at least in the Soviet view, to be allowed to continue
(see Intervention
, ch. 1).
The next two years saw the gradual dismantling of most of the
program. By the early 1970s, almost all traces of the reform
measures had vanished. Economic "normalization" resulted in a
reversion to mandatory central planning, price controls, and the
system of material balances. Only a few modifications of the
central planning system remained, including devolution of some
aspects of planning to the consolidated production units and
modification of some plan indicators to emphasize efficiency,
productivity, quality, and innovation rather than simply gross
output targets.
In spite of the apparently disruptive changes and political
turmoil of the late 1960s and early 1970s, the Czechoslovak
economy continued to grow at a respectable rate throughout the
period. From 1966 to 1970, the period of the Fourth Five-Year
Plan, net material product grew at an average annual rate of 6.9
percent, well exceeding the planned yearly increase of 4.1 to 4.4
percent. Performance was also gratifying during the Fifth Five-
Year Plan (1971-75). During this period, net material product
grew somewhat more slowly, averaging 5.7 percent yearly, but
still exceeded the planned rate of 5.1 percent yearly. The
fastest growing sectors in industry during both planning periods
were chemicals and engineering (growing at an annual rate of 8 to
10 percent); the slowest growing sectors were fuels (3 to 5
percent) and consumer goods (4 to 6 percent). Wages, incomes, and
personal consumption levels rose at respectable rates despite an
overall increase in investment. Agriculture continued to be a
weak area but had improved markedly. By 1975 the agricultural
sector was almost self-sufficient in animal production, and self-
sufficiency in crop production appeared to be an attainable goal.
Rural wages rose, and mechanization progressed rapidly.
During the Sixth Five-Year Plan (1976-80), by contrast,
economic performance was far less satisfactory; in the closing
years of the period, the slowdown in economic growth became
especially noticeable. Net material product grew by only 3.7
percent yearly on average, instead of the 4.9 percent called for
by the plan. Both agriculture and industry failed to meet planned
growth targets; 5.7 to 6.0 and 2.7 to 2.8 percent yearly growth
rates were planned, respectively, whereas the rates actually
achieved were 4.5 and 1.8 percent. The plan called for an annual
average increase in labor productivity of 4.5 percent, an
important goal, given constraints on expansion of the labor
force; 3.3 percent was actually achieved. Other difficulties
included insufficient technological improvement, failure to meet
the conservation goals for energy and materials, and less than
full use of fixed assets. In addition, the performance of
agriculture was disappointing, particularly after the optimal
climatic conditions and bumper crops of the early 1970s. Problems
in agriculture were in part a result of drought (1976) and severe
winter and spring flooding (1979). Other factors, such as
shortages of agricultural machinery and spare parts and poor
quality of fertilizer, also had an impact on the agricultural
sector. Large imports of grain necessarily continued. During the
plan period, growth rates in personal consumption declined,
reaching a low point of 0.5 percent in 1979. At the same time, in
contrast to the previous plan period, retail prices rose by about
11 percent over the 5-year period. During the last few years of
the plan, there were widespread consumer complaints about the
unavailability of basic commodities such as meat, milk, and
vegetables.
The economy's performance was lackluster despite the
continuing infusion of substantial investment funds. Since 1948,
investment had been the most dynamic element of economic growth,
with a growth rate substantially exceeding that of national
income. Gross investment had reached a peak of about 31 percent
of national income expenditures in the 1950s during
Czechoslovakia's most extensive development phase. Gross
investment limits of about 30 percent of national expenditures
had been typical during the 1960s. The same ceiling was set for
the Fifth Five-Year Plan, but the investment rate was edging up.
The limit was raised to a maximum of 31 to 33 percent for the
Sixth Five-Year Plan, but actual expenditures exceeded this rate,
being closer to 34 percent. In part, the rise in the investment
rate in the 1970s reflected large capital expenditures for
increased mining of coal and other fuels and for the development
of engineering branches to produce equipment for nuclear power
plants. Nevertheless, given the considerable funding poured into
the economy, the mediocre condition of the Czechoslovak
industrial plant in general at the end of the 1970s must have
been discouraging to economic planners.
The energy and trade problems Czechoslovakia faced in the
late 1970s were also major factors in the slowdown in industrial
growth. The terms on which Czechoslovakia conducted foreign trade
had begun to deteriorate sharply by the mid-1970s. After 1974 the
rapid rise of world oil prices was partially reflected in the
price of oil from the Soviet Union, Czechoslovakia's principal
source of fuel and raw materials. Prices of other materials on
which the country's economy depended also increased faster than
the prices of its exports, which consisted primarily of
manufactured goods (especially machinery). Party and government
leaders were cautious about increasing foreign indebtedness and
attempted to maintain a high level of exports. Increasingly in
the 1970s, a substantial portion of the country's production of
consumer goods and machinery was diverted to export markets to
meet the rising import bill. Restraints on imports from
noncommunist countries reduced inputs for domestic industries.
At the beginning of the 1980s, the economy had substantial
limitations, which were recognized by economists, political
leaders, and even the public at large. The country had perhaps
the oldest stock of plant and equipment in Eastern Europe, a
stagnant resource base, and growing dependence on energy and
material imports. To reduce requirements for energy and raw
materials and to increase the competitiveness of Czechoslovak
exports, domestic production needed to become more efficient.
Furthermore, consumption standards continued to be well below
those found in Western Europe.
Economic planners set relatively modest growth targets for
the Seventh Five-Year Plan, revising their goals downward two
years into the plan. "Intensification" of the economy--focusing
on efficient use of resources rather than simply quantitative
growth--was the keynote of government policy. The revised goals
called for a growth rate in net material product of 10.5 to 13.5
percent. Gross industrial output was to increase by 14 to 18
percent, and gross agricultural output by 7 to 10 percent.
Personal consumption was to rise by less than 3 percent.
The early years of the Seventh Five-Year Plan saw a serious
slump in the economy. During 1981 and 1982, personal consumption
actually declined. The cost of living rose more rapidly than
wages. During the final three years, however, an economic
recovery made up for the earlier poor performances; according to
official calculations, the country succeeded in either meeting or
surpassing domestic goals during the plan period as a whole.
Official reports listed the growth rate of net material product
at 11 percent, growth of gross industrial output at 14.5 percent,
growth of gross agricultural output at 9.8 percent, and increase
in personal consumption at 5.5 percent. Results of the
"intensification" effort were disappointing, however, as leaders
acknowledged. During the plan, consumption of energy decreased by
only 1.7 percent per annum, less than the 2 percent goal of the
plan (see
table 8, Appendix A).
The relatively favorable outcome of the Seventh Five-Year
Plan was noteworthy, particularly because several international
trends had had negative effects on the Czechoslovak economy
during the period. A recession in developed Western countries
dampened their markets for Czechoslovak exports; and in 1981 the
Soviet Union announced its intention to scale back oil exports to
Eastern Europe, including Czechoslovakia, by 10 percent. Although
in 1983 and 1984 worldwide prices for oil began to drop, the
Comecon (or Soviet) price, tied to a 5-year formula, caused the
price of Soviet oil (16.4 million of the 16.6 million tons
imported by Czechoslovakia in 1984) to continue to climb. In 1982
the decision of Western banks to restrict credit to Eastern
Europe as a result of Poland's serious payment problems and the
sizable debts of other East European countries impeded
Czechoslovakia's foreign trade with the West.
The poor performance of the economy in the early 1980s
persuaded party leaders that some changes were needed. Therefore,
in conjunction with the Seventh Five-Year Plan, in 1981 the
government introduced a series of limited reforms called the "Set
of Measures to Improve the System of Planned National Economic
Management after 1980." Relatively conservative in design and
initiated without fanfare, these reforms permitted somewhat
greater freedom of action for managers of enterprises in selected
operational areas, giving them more authority over their own
investment activities and over providing financial incentives to
workers. The intention was to make industry as a whole more aware
of prices and costs. The reforms did not call for any appreciable
loosening of central planning and control. In 1982 parallel
reform measures were introduced for agriculture; the measures
permitted farm officials to exercise greater management
initiative and limited the number of binding targets imposed on
farm production. Many Western observers believed that these
reforms did have a helpful effect during the final years of the
plan. It was felt, however, that these partial reforms were not
sufficiently comprehensive to bring about the modernization and
improvements in efficiency sought by Czechoslovakia's leaders.
Czechoslovakia -- ECONOMIC SECTORS
Data as of August 1987
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